By Stella Qiu

SYDNEY (Reuters) - Asian shares started cautiously on Monday after their best weekly run in five months, as investors looked ahead to China's rate decision and U.S. Federal Reserve Chair Jerome Powell's testimonies for clues on the rate path ahead.

S&P 500 futures rose 0.1% early in Asia while Nasdaq futures firmed 0.3%. Cash U.S. Treasuries were untraded owing to the Juneteenth holiday, while futures were up a fraction with little liquidity.

In Asia, Japan's Nikkei fell 0.5%, having clinched a fresh three-decade top on Friday, buoyed by the Bank of Japan's (BOJ) decision to leave its ultra-easy policy setting unchanged, which has sent the yen to a 7-month low against the U.S. dollar.

MSCI's broadest index of Asia-Pacific shares outside Japan was 0.1% lower, after hitting a four-month high on Friday and finishing up 3% for the week, the best since January.

In China, market hope for more forceful stimulus is growing after the cabinet met on Friday to discuss measures to spur economic growth. Also, the People's Bank of China is widely expected to cut its benchmark loan prime interest rates on Tuesday, following a similar reduction in medium-term policy loans last week.

Morgan Stanley (NYSE:MS)'s chief China economist Robin Xing expects an imminent stimulus package given second-quarter gross domestic product (GDP) growth is tracking at 0%, lagging the government's target of around 5% for the year.

"This requires more policy easing to stabilise investment – the key drag to 2Q GDP growth - and prevent weakness from spreading to household sentiment and services," said Xing.

After a busy central bank week as the stock market cheered the Fed's decision to skip a rate hike in June, investors are looking to a number of Fed speakers this week, with Powell set to deliver congressional testimonies on Wednesday and Thursday.

"Fed Chair Powell gives House and Senate testimony with focus on whether the July FOMC (Federal Open Market Committee) meeting is truly 'live', and if the Fed dot plot of two more hikes is a true base case depending on the data or more 'aspirational'," said Ray Attrill, head of foreign exchange strategy at National Australia Bank (OTC:NABZY).

Markets are pricing in a 70% probability of the Fed hiking by a quarter point in July before holding steady for the remainder of the year, though officials have sounded hawkish and the dot plot indicates two more hikes..

The dollar index was little changed against major peers early on Monday, after falling 1.2% the previous week, the most in five months.

The yen was undermined by a dovish BOJ, touching a seven-month low of 141.90 per dollar, while the hawkish the European Central Bank, which hiked by a quarter point last week, aided the euro to hover close to a five-week top at $1.094.

Oil prices declined early on Monday. U.S. crude futures fell 0.7% to 71.24 per barrel, while Brent crude was down 0.8% at $76.98 per barrel.

Gold prices were flat at $1,956.84 per ounce.

JERUSALEM (Reuters) -U.S. chipmaker Intel Corp (NASDAQ:INTC) will spend $25 billion on a new factory in Israel, Prime Minister Benjamin Netanyahu said on Sunday, calling it the largest-ever international investment in the country.

The factory in Kiryat Gat is due to open in 2027, to operate through 2035 at least and to employ thousands of people, Israel's Finance Ministry said. Under the deal Intel will pay a 7.5% tax rate, up from the current 5%, the ministry added.

During its almost five decades of operations in Israel, Intel has grown to become the country's largest privately held employer and exporter and a leader of the local electronics and information industry, according to the company's website.

In 2017, Intel bought Israel-based Mobileye Global Inc, which develops and deploys advanced driver-assistance systems, for $15 billion. Intel took Mobileye public last year.

Announcing the deal in televised remarks to his cabinet, Netanyahu called it "a tremendous achievement for the Israeli economy - 90 billion shekels ($25 billion) - the largest investment ever by an international company in Israel".

In a statement, Intel said its Israel operations had "played a crucial role" in the company's global success.

"Our intention to expand manufacturing capacity in Israel is driven by our commitment to meeting future manufacturing needs ... and we appreciate the continued support of the Israeli government," it said.

By Essi Lehto

HELSINKI (Reuters) - Finland's conservative National Coalition (NCP), winner of April's parliamentary election, has reached agreement to form a majority government with the eurosceptic, anti-immigration Finns Party and two smaller groups, its leader said on Thursday.

"All issues have been resolved and the papers are ready," said NCP leader Petteri Orpo, a fiscal conservative set to become Finland's next prime minister, referring to the government program.

By getting the NCP, the nationalist Finns, minority-language Swedish People's Party and the Christian Democrats to agree on a common platform, Orpo shifts Finnish politics to the right and sends left-wing Prime Minister Sanna Marin into opposition.

During 11-week talks over how to govern Finland during the coming four years the Finns and the Swedish People's Party had struggled to agree on immigration, climate policy and public finances, but reached a compromise in the end.

Orpo's government is expected to curb the fiscal deficit by cutting unemployment and welfare benefits, and to tighten immigration and loosen environmental commitments.

Each policy area was subject to tough negotiations, however it was not immediately clear how strong each measure would be.

Orpo has wanted to cut taxes and sell off stakes in some government-controlled companies, and said his government's policy programme would be presented on Friday. He declined to elaborate on any details.

The NCP won 48 seats in the April 2 election, ahead of the Finns with 46, while outgoing Prime Minister Marin's Social Democrats came third with 43 elected members of the 200-seat parliament.

To secure a majority, Orpo included the Swedish People's Party, which holds nine seats, and the Christian Democrats with five, bringing the total support to 108.

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)