SYDNEY, Dec 20 — The yen surged and Asian shares fell sharply today after Japan’s central bank unexpectedly tweaked its bond yield controls — a move that will allow long-term interest rates to rise more.

While the Bank of Japan kept broad policy settings unchanged it widened the allowable band for long-term yields to 50 basis points either side of that, from 25 basis points previously.

That triggered an immediate spike in the yen with the greenback dropping 2.71 per cent after the decision to 133.16 JPY=, a four-month low.

In turn, the Nikkei benchmark index slumped 2.71 per cent after trading in positive territory earlier in the day.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.6 per cent.

The BOJ decision was taken as a signal that the forces which drove the yen to three-decade lows this year may be beginning to turn.

"The move came earlier than I had expected but a step towards the normalisation process of policy in Japan,” Kerry Craig, JP Morgan Asset Management’s global markets strategist, told Reuters.

"The market implications are most prevalent in the forex markets given the divergence between US and Japanese policy settings.

"While there is still a wide gap, the hint that the BOJ is moving incrementally away from ultraloose policy should be yen positive in the near term.”

Elsewhere in Asia, Australian shares extended earlier losses to be off by 1.54 per cent in afternoon trade.

Hong Kong’s Hang Seng Index was down 1.9 per cent while China’s Index was off 1.62 per cent.

In early European futures trading, the pan-region Euro Stoxx 50 futures were down 1.23 per cent at 3,772, German DAX futures were down 1.32 per cent at 13,832 and FTSE futures were down 0.83 per cent at 7,306.5.

US stock futures, the S&P 500 e-minis, were down 0.85 per cent at 3,812.8.

In Asian trading, the yield on benchmark 10-year Treasury notes rose to 3.6825 per cent compared with its US close of 3.583 per cent yesterday.

The two-year yield, which rises with traders’ expectations of higher Fed fund rates, was at 4.2848 per cent compared to the US close of 4.262 per cent.

China’s reopening to the rest of the world from nearly three years of Covid lockdowns continued to be a major concern for investors.

Credit Suisse yesterday upgraded its outlook from neutral to outperform for China’s equities markets in the year ahead.

"The whole narrative of China has changed, it’s gone from Covid zero that was putting the economy under pressure and there’s now an intention to move towards a reopening,” Suresh Tantia, Credit Suisse’s senior investment strategist.

"And as that happens, we will see an recovery in China’s economy and markets.”

US crude ticked up 0.41 per cent to US$75.5 a barrel. Brent crude rose to US$79.87 per barrel.

Spot gold was slightly higher at US$1,790.83 per ounce. — Reuters