Asian Market Update: BoJ Raises Economic Assessment, No Longer Sees Severe Deterioration

- Asian equity indices are looking to finish the week on a quieter tone, trending slightly lower afer broadbased losses registered on Wall St. Nikkei225 is entering the final hour down 0.6% and relatively unchanged from closing levels at the end of last week. Korea's Kospi is off by 0.5% at 1,415, while bourses in Australia and Hong Kong led the selloff with respective 1.5% and 1.9% losses. Front-month S&Ps are trading around unchanged levels below 890 while US benchmark fixed income yields remain firm in mid-3.30%'s.

- Leaving interest rates unchanged, Bank of Japan surprised the markets by raising its economic assessment on the economy for the first time since July of 2006. BOJ noted that the pace of severe economic deterioration - a view it preserved in recent months - will moderate gradually, as the economy stages a recovery in the second half of FY09. In the latest measure to secure liquidity, BOJ also moved to accept sovereign debt of US, UK, French and German governments, as well as other sovereign debt rated above AA. Despite the downgrade in severity of outlook. BOJ did suggest that inflation may continue to decline further than expected and uncertainty over additional downside risks was still in place. This should effectively keep expectations for eventual rate tightening to a minimum, resulting in minimal impact on currencies following the BOJ announcement.

- Afterhours US session saw a fair share of notable developments in both the corporate sector as well as vocal Fed-speak from two non-voting Fed Presidents. Washington Post speculated that the Obama administration is preparing to send GM into bankruptcy as early as next week in a precondition to grant the company an additional $30B in funding. Subsequent rumors from the US Treasury suggested that the administration would not force bankruptcy proceedings before the June 1st deadline however. Earlier, Philadelphia Fed President Plosser and Boston's Rosengren locked horns over the outlook for inflation and the preferred focus of the Fed on price trends. Plosser stated that positive but modest growth in US is likely to resume by second half of 2009, reaching 3% by 2010 and justifying a more intense focus on inflationary risks away from deflationary potential. Rosengren - an alternate member on the FOMC - was slightly more downbeat in his view, forecasting slow recovery and greater uncertainty over expectations of a quick rebound, preferring that the Fed maintains its focus on deflation risks. PIMCO's Bill Gross reiterated his concerns over the US AAA credit rating, affirming his view expressed in US session that AAA may be in jeopardy within 3-4 years.

- In currencies, US Dollar accelerated its losses, reaching multi-month lows against a broad range of European and Commodity Majors, with weakness attributed to . EUR/USD rose above 1.3950, while USD/CHF fell toward 1.09 - dollar's worst levels since early January. Sterling approached 1.59 despite the S&P downgrade reported earlier in the session, reaching its best levels since early November. In commodity FX, AUD/USD, USD/CAD, and NZD/USD had also registered worst levels for the greenback, reaching respective USD lows of 0.7820, 0.6175, and 1.1320. Japanese Yen hardly budged after BOJ, briefly strengthening but unable to retest the 94.00. Broadbased commodity rally seen in US generally consolidated over Asian hours as front-month crude remained below $62 handle and gold retreating from $957 intraday high.