Nikkei slips after BOJ rate hike as Asia eyes Fed, US-Iran pact

The Nikkei 225 dropped 0.3% after the Bank of Japan raised its policy rate to 1%, the highest level in 31 years. Asian markets adjusted after a preliminary US-Iran framework and turned attention to Reserve Bank of Australia and Federal Reserve decisions due later in the week.

Asian stocks lost early momentum after a rally driven by hopes of a reopening of the Strait of Hormuz pushed oil lower and lifted US equities. That relief eased once the BOJ delivered a larger-than-expected rate increase. Weak Chinese retail sales and fixed-asset investment data also weighed on Hong Kong shares and trimmed regional gains.

Japan became the main policy focus as traders assessed whether the BOJ will signal further tightening. Governor Kazuo Ueda did not attend the post-meeting briefing while undergoing medical treatment; Deputy Governor Shinichi Uchida answered questions on the decision and the central bank’s outlook. Mitsubishi UFJ analysts expected little change to the BOJ’s overall assessment and anticipated Uchida to follow the stance outlined by Ueda in a June 3 speech.

The preliminary US-Iran framework reduced some of the wartime risk premium in crude, but shipping firms cautioned that confidence in transit through the Strait of Hormuz may take time to return. Brent crude was little changed around $83 a barrel after settling at its lowest level since March. Westpac analysts described the pact as “an important diplomatic breakthrough” while warning its durability would be tested by unresolved issues, including Iran’s nuclear programme.

MSCI’s broadest index of Asia-Pacific shares outside Japan was flat after giving up early gains. Hong Kong underperformed after China’s activity data missed estimates, cutting demand for equities tied to domestic consumption and investment growth. Market participants also noted a strong US session on Monday: the S&P 500 rose 1.7%, the Nasdaq Composite jumped 3.1%, and the Dow Jones Industrial Average closed at a record high. Europe’s Stoxx 600 also ended that trading day at a record.

Attention now turns to policy meetings later in the week. The Reserve Bank of Australia is widely expected to hold rates at 4.35% after three increases this year. Market indicators were steady: the dollar index hovered near 99.69 and the US 10-year Treasury yield was around 4.47%. Gold edged higher to about $4,311 an ounce.

Market participants are awaiting confirmation that the US-Iran framework will hold and are seeking guidance from central banks to clarify the outlook for monetary policy.