By Georgina Lee

HONG KONG (Reuters) - Hong Kong interbank rates rose across all tenors on Friday, with the overnight interbank offered rate rising the most, climbing to the highest in four weeks.

The overnight Hong Kong interbank offered rate (Hibor) jumped 63.5 basis points (bps) to 4.88%. One-week Hibor rose 62 bps to 4.92%, highest in nearly 16 years.

One-month Hibor, the benchmark used in pricing residential mortgage loans, rose 21.8 bps to 4.97%, the highest since December 2022.

Hong Kong listed companies' demand for Hong Kong dollars for dividend payments peaks in the three months to August and this could send interbank rates higher, Hong Kong Monetary Authority (HKMA) Chief Executive Eddie Yue said in an article published on the HKMA website on Wednesday.

TOKYO (Reuters) -Japan will give Toyota up to $841 million in subsidies for the automaker's investment in domestic production of batteries used in electric vehicles (EVs), Industry Minister Yasutoshi Nishimura said on Friday.

Toyota this week laid out a sweeping plan for new technology and a radical redesign of factories, sending the clearest signal yet of its intention to capture a larger share of the fast-growing market for battery EVs, where it has been far outsold by rivals such as Tesla (NASDAQ:TSLA).

"As the international competition for storage batteries is intensifying, competition for capital investment is also becoming more intense," Nishimura told reporters at a media conference.

"Large-scale investments by Toyota group and so on will hopefully lead to a significant strengthening of our country's supply chain for storage batteries," he said.

There were no further details about the investment that Toyota could provide beyond those already disclosed by the ministry, a company spokesperson said.

The government said mass production of the batteries was expected to start in stages from October 2026 onwards.

Japan has designated batteries for energy storage, including car batteries, as important under an economic security law and has earmarked 331.6 billion yen in its second supplementary budget to support their supply and development, the Ministry of Economy, Trade and Industry (METI) said.

The government will shoulder up to 117.8 billion yen ($841 million) yen, or just over a third of about 330 billion yen in investments including for development of next-generation solid-state batteries and lithium iron phosphate batteries, METI said.

It said the subsidy will be provided to Toyota and three companies with which it is working on battery development, including Toyota Industries (OTC:TYIDF).

The investment will bring annual production capacity in Japan to 45 gigawatt hours (GWh), Nishimura said, adding the government seeks to achieve domestic output capacity of 150 GWh by 2030.

Japan's No.2 automaker Honda Motor and battery maker GS Yuasa in April announced the building of a new plant that would target an annual production capacity of at least 20 gigawatt hours (GWh).

($1 = 140.0700 yen)

By Ankur Banerjee

SINGAPORE (Reuters) - Asian shares rose to a near four-month high on Friday as resilient U.S. economic data stoked expectations that the Federal Reserve is near the end of its rate-hike campaign, with investor focus switching to the Bank of Japan's policy meeting.

MSCI's broadest index of Asia-Pacific shares outside Japan was 0.31% higher and on course for 2.5% gain in the week, its best weekly performance since January. The index rose as high as 534.16, its highest since mid-February.

Japan's Nikkei was down 0.79%, easing away from a fresh 33-year high it touched on Thursday, while Australia's resource-heavy S&P/ASX 200 index rose 0.40%.

The BOJ rounds up a central bank heavy week, with broad expectations that the central bank will stick with its ultra-loose monetary policy even as inflation ticks higher.

Markets will focus on whether BOJ Governor Kazuo Ueda will offer a stronger warning on the risk of an inflation overshoot at his post-meeting news conference.

"Economic conditions are telling the BoJ that its ultra-easy policy has passed its used-by date, yet given what Ueda has been saying, the consensus view is that the BoJ will stand pat, said Rodrigo Catril, senior FX strategist at National Australia Bank (OTC:NABZY).

"That said, if the BoJ wanted to surprise the market, today would be a good day."

China's stock markets got a boost this week after the central bank cut the borrowing cost of its medium-term policy loans for the first time in 10 months to aid a shaky economic recovery, with investors hoping more stimulus is on the horizon.

On Friday, China's benchmark CSI 300 Index was 0.3% higher while Hong Kong's Hang Seng Index gained 0.4%.

The S&P 500 and Nasdaq surged on Thursday to close at their highest in 14 months after data showed U.S. retail sales unexpectedly rose in May, while U.S. jobless claims came in higher than expected.

"If U.S. labour markets are finally starting to soften, this lends some credibility to the Fed’s decision to pause," said Ryan Brandham, head of global capital markets, North America at Validus Risk Management.

The slew of data helped firm up bets that the Fed would not follow through with more rate hikes as the central bank hinted on Wednesday when it left interest rates unchanged.

Markets are now pricing in 67% chance of the U.S. central bank raising its interest rate by 25 basis points next month, according to CME FedWatch tool.

The European Central Bank on Thursday left the door open to more rate hikes as it flagged risks from rising wages and revised up its inflation projections. The ECB also raised interest rates by 25 bps taking its policy rate to 3.5%, a level not seen since 2001.

"(ECB President) Lagarde insisted that there was more ground to cover, but the overall tone of the press conference suggested that there might not be a whole lot more to do, despite the upgrade to the inflation forecast," strategists from NatWest Markets said in a note.

In the currency market, the euro was at $1.0941, hovering close to one-month high it touched on Thursday after the ECB decision. [/FRX]

The dollar index, which measures the U.S. currency against six major peers, was at 102.13, drifting near a one-month low.

The Japanese yen strengthened 0.18% to 140.04 per dollar, but was not far from the seven month low of 141.50 it hit on Thursday.

Oil prices eased, taking a pause from the previous session when futures gained steeply on optimism around higher energy demand from top crude importer China.

U.S. West Texas Intermediate crude fell 0.13% to $70.53 per barrel and Brent was at $75.54, down 0.17% on the day. [O/R]

Spot gold added 0.1% to $1,958.99 an ounce. U.S. gold futures % to $1,957.80 an ounce.

By Leika Kihara

TOKYO (Reuters) - The Bank of Japan is widely expected to maintain ultra-easy monetary policy on Friday despite stronger-than-expected inflation, as it focuses on supporting a fragile economic recovery amid a sharp slowdown in global growth.

The central bank is also likely to keep intact a pledge to "patiently" sustain massive stimulus to ensure Japan sustainably achieves its 2% inflation target accompanied by wage hikes.

With price rises showing signs of broadening, however, markets are focusing on whether BOJ Governor Kazuo Ueda will offer a stronger warning on the risk of an inflation overshoot at his post-meeting news conference.

The BOJ review comes after the Federal Reserve's decision on Wednesday to pause interest rate hikes as it closely watches the lagged economic impact of past monetary tightening.

At the two-day meeting ending on Friday, the BOJ is widely expected to maintain its -0.1% short-term interest rate target and a 0% cap on the 10-year bond yield set under its yield curve control (YCC) policy.

While the central bank may warn about risks to the global outlook, it will likely stick to its view Japan's economy is headed for a moderate recovery thanks to a post-pandemic pickup in consumption, sources have told Reuters.

Japan's core consumer inflation hit 3.4% in April, staying above the BOJ's target for over a year, keeping alive market expectations the bank will phase out YCC sometime this year.

Ueda has repeatedly brushed aside the chance of a near-term YCC tweak, arguing that the recent, cost-push inflation will slow back below the BOJ's target later this year.

But he also said the BOJ will "act swiftly" if its inflation projections prove wrong, and pointed to signs that corporate price-setting behaviour was starting to change.

With companies offering the largest pay hikes in three decades, the BOJ is also dropping hints that Japan's prolonged era of wage stagnation may be ending.

In an academic paper issued in May, the BOJ said inflation and wage growth could accelerate abruptly once costs exceed a certain threshold - and that once wages begin to rise, the trend could persist.

Many BOJ officials, however, prefer to stand pat for now to scrutinise global economic developments and corporate earnings, for clues on whether wages will keeping rising next year.

Japan's economy is making a delayed recovery from the pandemic and expanded an annualised 2.7% in the first quarter, with solid corporate and household spending moderating the blow from soft exports.

By Ariba Shahid

(Reuters) - The International Monetary Fund (IMF) on Thursday expressed dissatisfaction with Pakistan’s recently presented budget, a blow for the cash-strapped country which has only two weeks left until its bailout programme expires.

Pakistan has barely enough currency reserves to cover one month's imports. It had hoped to have $1.1 billion of the funds released in November - but the IMF has insisted on a number of conditions before it makes any more disbursements.

With time for only one last IMF board review before the end of the $6.5 billion Extended Fund Facility (EFF), Pakistan was expected to present a budget in line with programme objectives, restore the proper functioning of the FX market, and close the $6 billion gap ahead of the board review.

"Staff remains engaged to discuss policies to maintain stability. However, the draft FY24 Budget misses an opportunity to broaden the tax base in a more progressive way," Esther Perez Ruiz, the IMF's resident representative for Pakistan, said in a text message to Reuters.

She added that the long list of new tax expenditures further reduces the fairness of the tax system and undercuts the resources needed for vulnerable recipients in the Benazir Income Support Programme.

"The new tax amnesty runs against program’s conditionality and governance agenda and creates a damaging precedent," added Perez Ruiz.

She said that measures to address the energy sector’s liquidity pressures could be included alongside the broader budget strategy.

Added Perez Ruiz: "The IMF team stands ready to work with the government in refining this Budget ahead of its passage," implying the country still has a chance to unlock its ninth IMF board review prior to the end of the EFF programme.

A Pakistan government spokesman did not immediately respond to a request for comment.

By Francesco Canepa and Balazs Koranyi

FRANKFURT (Reuters) -The European Central Bank is all but certain to raise borrowing costs to their highest level in 22 years on Thursday and leave the door open to more hikes, extending its fight against high inflation even as the euro zone economy flags.

Growth across the 20 countries that share the euro is at best stagnating and inflation has been moderating for months, courtesy of lower energy prices and the steepest increase in interest rates in the ECB's 25-year history.

Furthermore, the U.S. Federal Reserve broke a string of 10 successive rate hikes late on Wednesday, a powerful signal for investors around the world that the current tightening cycle across developed economies is nearing an end, even if more U.S. rate hikes are still possible.

But inflation in the euro zone is still unacceptably high for the ECB at 6.1% - more than three times its 2% target - and underlying price growth, which typically excludes food and energy, is only starting to slow.

That is likely to keep the ECB on the tightening path, particularly after it failed to predict the current bout of high inflation and began raising rates later than many global peers last year.

"They simply cannot afford to mess it up once again," said Carsten Brzeski, the global head of macro at Dutch bank ING.

The ECB is predicted to increase the deposit rate - the interest rate banks pay to park cash securely at the central bank - for the eighth consecutive time, by 25 basis points to 3.5%, its highest level since 2001.

Economists polled by Reuters expect another move of the same magnitude in July, a move a host of policymakers have already flagged, possibly to put pressure on colleagues going into Thursday's meeting.

While moves beyond July are less certain, ECB President Christine Lagarde is expected to keep a further hike in September in play and to push back against investor bets that the central bank will cut rates early next year.

"The bigger question is about the forward guidance," JPMorgan (NYSE:JPM) economist Greg Fuzesi said. "We are not convinced that the statement will signal or suggest that a July hike may be the last."

The Fed's pause was expected to temper ECB rate hike bets but investors actually pushed up their rate expectations overnight and now see the deposit rate peaking at 3.85%, suggesting that one more rate move after July is increasingly likely.

MIXED PICTURE

The ECB will update its economic forecasts, which are likely to put inflation closer to, but still above, 2% next year before it reaches the target in 2025.

While this would normally augur a pause in policy tightening, the ECB has been taking its own projections with a pinch of salt after years in which they missed the mark.

Instead, euro zone rate-setters have focused on actual economic data that have been painting a mixed picture.

Two quarters of contraction in industrial powerhouse Germany dragged the euro zone into a shallow recession last winter and the economy is likely to eke out only modest growth this year.

But unemployment is at record lows and wage growth is picking up, even if it still lags inflation.

Headline price growth has been falling fast after hitting double-digits late last year. But underlying prices, most notably for services, have yet to show the decisive drop ECB policymakers have said they would need to see before taking their foot off the monetary brake.

Higher borrowing costs are curbing demand for credit from households and companies as well as banks' willingness to lend, but consumption is holding up well in nominal terms.

These opposing factors were likely to provide ammunition to both sides of the ECB's Governing Council - the hawkish majority that has been pushing for more rate hikes and a minority of doves who have been advocating a pause.

As a result, economists expect the ECB to send out a more balanced message about the outlook than at recent meetings, when it stressed the need to raise rates further to cool demand.

"The ECB will probably emphasise even more strongly than before that its future policy path is data-dependent amid heightened uncertainty," economists at Berenberg wrote in a note to clients.

By Tetsushi Kajimoto and Kantaro Komiya

TOKYO (Reuters) -Japan's exports grew unexpectedly in May on robust car sales, though the rate of expansion slowed to a crawl as inflation and rising interest rates bit into global demand, highlighting a patchy recovery in the world's third-largest economy.

While the country's hotels, restaurants and other service sector companies have seen a boom in business since COVID curbs were eased, its factories have been struggling amid weakening demand for cyclical items such as chip-making machines.

Ministry of Finance data showed on Thursday that exports rose 0.6% year-on-year in May, for the 27th straight month of rises, led by 66% growth in car shipments.

The overall exports growth was the slowest since February 2021, but the outcome beat a 0.8% year-on-year decrease expected by 16 economists in a Reuters poll, and followed a 2.6% rise in April.

"Semi-conductor equipment and related exports were the main sources of export weakness, which chimes with the sharp drop in exports to countries like Taiwan and South Korea...offset by continued strength in motor vehicle exports," said Darren Tay, Japan economist at Capital Economics.

This year, domestic demand may temporarily outpace slumping exports as a key driver of growth, said Takeshi Minami, chief economist at Norinchukin Research Institute.

Separate government machinery orders data, also released Thursday, underlined the struggles faced by manufacturers though the overall numbers suggested the services sector is providing some cushion to the economy.

Core machinery orders rose 5.5% in April from the previous month, the first increase in three months and above the median forecast for a 3.0% gain. While orders from manufacturers were down 3.0%, an 11.0.% growth in service-sector demand for items such as computers drove up the headline figure.

On a year-on-year basis, core orders, a highly volatile data series regarded as a leading indicator of capital spending in the coming six to nine months, fell 5.9%, versus a forecast for a decline of 8.0%, the Cabinet Office data showed.

IMPORTS STILL WEAK

The data will be among other key indicators to be scrutinised by the Bank of Japan as it holds two-day policy setting meeting that ends on Friday.

Japan's gross domestic product (GDP) expanded an annualised 2.7% in January-March, much higher than a preliminary estimate of a 1.6% growth, as revised capital expenditures and firm private consumption more than offset the slowdown in external demand.

The trade data also showed imports fell 9.9% in the year to April, down for the second straight month on softening commodity prices, versus the median estimate for a 10.3% decrease.

The trade balance came to a deficit of 1.3725 trillion yen ($9.80 billion), versus the median estimate for a 1.3319 trillion yen shortfall.

By region, Japanese exports to China, the country's largest trading partner, fell 3.4% year-on-year in May for their sixth month of decrease, due to shrinking steel and auto parts shipment, although items such as cars and semiconductors recorded growth.

U.S.-bound exports, another key market for Japanese exports, grew 9.4% in the year to May on double-digit gain in car shipment.

"For the outlook of Japanese exports, the U.S. Fed's rate-hike pause is a positive news that will further vitalise American private consumption", said Kazuma Kishikawa, economist at Daiwa Institute of Research.

"With recovery in Chinese goods spending and easing supply bottlenecks for Japanese manufacturers, Japan's export volume will gradually pick up."

($1 = 140.0300 yen)

BEIJING (Reuters) - China's new home prices rose for the fifth straight month in May, but at a slower pace, according to official data on Thursday, as the government looks to shore up the crisis-hit property sector.

New home prices in May rose 0.1% month-on-month, slower than a 0.4% gain in March, according to Reuters calculations based on National Bureau of Statistics (NBS) data.

Prices rose for the first time since April 2022 in annual terms, up 0.1% from a 0.2% drop in April.

Beijing's broad-based stimulus measures to prop up the embattled property market since late last year had boosted sentiment in the wake of the abrupt end of COVID-19 curbs in December. But the sector is expected to grapple with "persistent weakness" for years, Goldman Sachs (NYSE:GS) analysts said this week, adding its problems would continue to drag on economic growth.

By Lucy Craymer

WELLINGTON (Reuters) -New Zealand's economy shrank in the first quarter as the central bank's aggressive hiking of interest rates to a 14-year high hurt businesses and manufacturers, while bad weather hit farms, putting the country into a technical recession.

Official data out on Thursday showed gross domestic product (GDP) fell 0.1% in the March quarter, in line with a Reuters poll, and followed a revised 0.7% contraction in the fourth quarter. With two quarters of negative growth, the country is now in a technical recession.

Annual growth slowed to 2.2%, Statistics New Zealand data showed. 

The March 2023 quarter included the initial impacts of Cyclones Hale and Gabrielle and teachers’ strikes.

"The adverse weather events caused by the cyclones contributed to falls in horticulture and transport support services, as well as disrupted education services," said Jason Attewell, economic and environmental insights general manager at Statistics New Zealand.

The weakness in the economy will not be seen as a negative by the central bank, which has said it needs economic growth to slow to dampen inflation and inflation expectations.

The contraction will likely add to expectations that the cash rate has now peaked, economists say.

The Reserve Bank of New Zealand has undertaken its most aggressive policy tightening since 1999, when the official cash rate was introduced, lifting it by 525 basis points since October 2021 to 5.50%. However, it has signaled that it has finished hiking.

Before the first-quarter GDP figures were released, the central bank had forecast the country would enter a recession in the second quarter of 2023, while Treasury's updated forecasts in May expected the country to avoid recession.

By Lucy Craymer

WELLINGTON (Reuters) - New Zealand needs to keep increasing the supply of houses to address housing affordability, which is still a concern, the International Monetary Fund said on Wednesday, adding that land should be freed up to promote investment.

“The cyclical downturn in (house) prices does not imply that the structural housing shortage has been addressed. There is a strong need to expand housing supply, including for social housing to improve affordability,” the IMF said in a statement issued after its "Article IV" review of New Zealand policies

New Zealand house prices have fallen roughly 16% since their peak in November 2021 as the central bank has aggressively hiked the cash rate with the intent of dampening inflation. However, New Zealand still has one of the highest house-price-to-income ratios in the world.

The IMF report said while prices have fallen, financial stability risks appear contained.

It added that achieving long-term affordability depends critically on freeing up land supply and improving planning and zoning, and fostering infrastructure investment to enable fast track housing developments and reduce construction costs and delays.

More broadly, the IMF said that New Zealand’s economic growth is expected to slow to 1% annually both this year and next while inflation will likely gradually decline to be between 1% and 3% by 2025.

“Risks to the outlook stem from the external environment and a potential need for stronger tightening of monetary and financial condition,” it said.