* In wake of Fed, Bank of Japan seen cutting rates on
Friday
* U.S. bond yields rise from record lows, JGB yields sink
* Bank stocks rally with borrowing costs expected to fall
By Kevin Plumberg
HONG KONG, Dec 17 (Reuters) - Asia stocks rose and the U.S.
dollar remained under pressure on Wednesday after the Federal
Reserve cut rates to a record low, paving the way for regional
policymakers to take more aggressive actions to support growth.
Government bonds rallied after the Fed also said it would
use unconventional means to revive the U.S. economy from a deep
recession, including buying long-dated Treasuries, as other
central banks were expected to slash their benchmark rates,
ushering in an unprecedented era of cheap money.
U.S. Treasuries slid after a sharp rally overnight, but
Japanese government bonds climbed, pushing down the 10-year
yield to an 8-month low, on growing speculation the Bank of
Japan would cut the overnight cash rate from its current low
level of 0.3 percent as early as Friday.
"This opens door for more rate cuts in Asia. Everyone is
now looking at the Bank of Japan, which may feel compelled to
cut rates for some symbolic gesture," said David Cohen,
director of Asian economic forecasting with Asian Economics in
Singapore.
"The Fed has emphasised the further deterioration of their
economy. A similar situation holds in Asia, so central banks
will have some motivation to cut rates further."
Japan's Nikkei share average <> rose 1 percent, led by
banks, though uncertainty about the course of the yen capped
gains of exporter stocks.
Shares of the country's second-largest bank Mizuho
Financial Group <8411.T> were up 4 percent, while Sumitomo
Mitsui Financial Group <8316.T> climbed 4.4 percent.
Mitsubishi UFJ Financial Group <8306.T>, Japan's biggest
bank, was up 3.7 percent.
The MSCI index of stocks elsewhere in the Asia-Pacific
<.MIAPJ0000PUS> rose 2.7 percent, extending its gain in
December to 10.6 percent as foreign investors wade back into
the region, seeking value and sustainable growth.
Hong Kong's Hang Seng index <> led the region higher,
up 1.8 percent, boosted by a 2.4 percent rise in Industrial and
Commercial Bank of China <601398.SS><1398.HK>.
In an all-out battle to protect the U.S. economy from
profit-evapourating deflation, the Fed explicitly said it would
take steps to make sure benchmark rates remain low for some
time and to keep its balance sheet loaded with debt.
U.S. DOLLAR RALLY LOOKS MATURE
The prospect of effectively littering the financial system
with dollars kept the U.S. currency struggling. The rally it
enjoyed earlier this month on the back of U.S. investor capital
flows back home has clearly faded.
"You are starting to move away from dollar-positive signals
and dollar-bullish signals we've had over recent months," said
Dwyfor Evans, currency strategist with State Street Global
Markets in Hong Kong. "People are getting a little concerned
with the whole idea of quantitative easing. To the extent that
means simply throwing more dollars on to the market, then that
implies a weakness in the currency," he said.
The euro rose 0.5 percent to $1.4065 <EUR=>, approaching a
2-1/2-month high reached overnight just below $1.4200. Since
December began the euro has strengthened by around 13 cents as
dealers close out of positions as the end of 2008 approaches.
The dollar dipped 0.1 percent against the yen compared to
late U.S. trading on Tuesday to 88.84 yen <JPY=>, edging back
towards a 13-year low of 88.10 yen hit on trading platform EBS
late last week.
Commodities got a boost from a weaker dollar, with copper
futures edging higher and oil <CLc1> rising above $44 a barrel
on expectations OPEC will cut supplies further.
BOND YIELDS STAY LOW
Data reflecting a worsening global economic recession have
kept demand for government bonds high, especially heading into
year end. However, expectations that other central banks will
follow the Fed's lead and aggressively cut rates as well as
pour liquidity into particular areas desperate for cash has
increased hunger for government paper.
The benchmark 10-year Japanese government bond yield
<JP10YTN=JBTC> dropped 3.5 basis points to 1.330 percent, the
lowest since mid-April.
The 2-year yield dropped to the lowest since February 2006,
shrinking the advantage of 2-year U.S. Treasury yields over
Japan's to 21 basis points. On Tuesday, the spread was the
lowest since 1992, according to Reuters data.
U.S. Treasuries sold off in Asia, but only after yields hit
record lows overnight in the wake of the Fed's actions.
The 10-year note <US10YT=RR> yield edged up to 2.29 percent
after hitting 2.26 percent on Tuesday, the lowest since 1951,
according to Global Financial Data. The yields on 2-year and
30-year U.S. paper fell to record lows.
Given the moves in U.S. yields, some investors were moving
back to the short end of the yield curve from longer
maturities.
"The Fed will have to continue to focus on the more
innovative forms of monetary stimulus," said Mike Zelouf,
product specialist at Western Asset Management, a part of Legg
Mason.
"With Treasury yields at historic lows, and potentially
trillions of dollars of new government issuance in the
pipeline, it is appropriate to reduce durations in the U.S.
back to or even slightly below benchmark levels with an
emphasis on shorter-dated yields, he said in a note.
(Editing by Lincoln Feast)
