Tokyo investors will be cautiously watching global stock markets for cues next week to gauge the impact of the US central bank's decision not to raise rates, analysts said. Dealers will have three extra days to digest the news, which saw Tokyo shares defy a rally across Asia to end the final day of the week lower, as markets will be closed until Wednesday.
"After the US Federal Reserve's decision to stay pat on monetary policy, investors will watch movement in foreign markets, as well as a series of data including China's manufacturing PMI," said Hiroaki Hiwata, strategist at Toyo Securities.
China's manufacturing purchasing managers index is due on Wednesday and Japanese consumer price data for August on Friday, while a series of US data will be closely watched next week.
"If foreign markets move into positive territory, Japanese stocks will likely pick up too," Hiwata said.
On Friday, Tokyo shares retreated almost two percent, defying a broad regional rally, as the yen strengthened against the dollar after the US Federal Reserve held fire on raising interest rates. The Nikkei 225 index at the Tokyo Stock Exchange dropped 1.96 percent, or 362.06 points, to close at 18,070.21. Over the week, the index slipped 1.06 percent.
The broader Topix index of all first-section shares was down 1.98 percent, or 29.53 points, at 1,462.38. It lost 1.21 percent over five sessions.
After a highly anticipated two-day meeting the Fed on Thursday said it would leave its borrowing rates at zero, with governor Janet Yellen citing concerns about the world economy and particularly China's sharp slowdown.
The Fed's decision followed widespread warnings about the dire impact a rate increase could have, with the World Bank predicting this week it would cause a "perfect storm" in financial markets.
"A lot of our focus has been on risks around China, but not just China, emerging markets more generally and how they may spill over to the United States," Yellen said at a news conference following the rate announcement.
While many had expected the Fed to back off a first hike in nine years, the tone of Yellen's comments took some by surprise.
"It seems logical the (US) central bank would have raised rates if it weren't for recent international developments, but they tried desperately to buy themselves flexibility," Chris Weston, chief market analyst at IG, said in an email to clients.
The decision not to raise rates hit the dollar, which was trading at 119.78 yen in Tokyo, against 120.01 yen in New York and well off the 120.90 yen in Asia earlier Thursday.
The strengthening yen pushed Japanese shares in negative territory. Analysts say traders see the currency as a safe haven, which means it strengthens in times of turmoil and uncertainty.
The euro was at $1.1401 against $1.1436 in US trade and much stronger than the $1.1302 Thursday in Japan, while the single currency was also at 136.54 yen, down from 137.25 yen in New York.
Eisaku Sakakibara, a former vice minister, predicted the Japanese currency will keep rising. "The period of cheap yen is beginning to be over and I think gradually the yen-dollar rate will move toward the range of 115 to 120," Sakakibara said.
"The yen may trade slightly stronger with the delay in the Fed's rate hike and global economic uncertainty," he said, according to Bloomberg News.
In stocks trading, the stronger yen weighed on exporters as it makes their goods more expensive abroad and hurts repatriated profits.
Toyota was down 1.41 percent at 7,234 yen, electronics maker Sony lost 3.39 percent to 3,115 yen, and market heavyweight Fast Retailing, operator of the popular Uniqlo clothing chain, fell 2.62 percent to 46,160 yen.
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