Japan shares bounce, caution rules elsewhere

Tokyo rallies as talk of corporate tax cut resurfaces

Asian share markets were left in limbo on Thursday as investors sweated out the latest battle over the US budget, though Tokyo rallied as talk of a corporate tax cut resurfaced.

After a weak start, Japan's Nikkei erased all its losses to be up 0.3% after Kyodo News reported the government would consider cutting corporate taxes, a proposal that has swung in and out of favour for weeks now.

The bounce in shares in turn weighed on the yen, already pressured by Japanese selling for month and quarter-end. The dollar popped up to 99.00 yen, from an early 98.46, while the euro gained almost a full yen to 133.83.

Measured against a basket of currencies, the dollar eked out a gain of 0.14% and it was only barely changed on the euro at $1.3518.

Elsewhere caution was the watchword, with MSCI's broadest index of Asia-Pacific shares outside Japan down 0.3%. Shanghai stocks shed 1.1% and Singapore lost 0.5%.

With the outlook for US monetary policy up in the air, dealers were reluctantly conceding attention to the budgetary antics going on in Washington.

Congress is currently struggling to pass a spending bill to keep the government funded beyond October 1, but that is just a taster for the fight over raising the debt limit.

US Treasury Secretary Jack Lew warned that the United States would exhaust its borrowing capacity no later than October 17, though analysts reckon it could keep paying its debts to at least the end of the month.

"Between now and Monday evening, we expect Congress to pass a continuing resolution (CR) that funds the government to at least November 15, if not longer," Deutsche Bank economists wrote in a client note.

"If a CR is passed in time, or if the government closes for only a day or so, the probability of a debt ceiling impasse is reduced. Critically, under no circumstance do we expect the Treasury to default on its obligations."

In the past, the US dollar and stocks have tended to weaken ahead of such political showdowns, only to rally once the issue was resolved.

So far markets are following the script with the Dow Jones industrial average down 0.4% on Thursday, while the S&P 500 Index faded 0.27%. It was the fifth consecutive session of losses for the benchmark S&P 500, the first such period for 2013.

The MSCI world equity index, which tracks shares in 45 countries, was down 0.1%.

It is down more than 1% from highs reached right after last week's decision by the US Federal Reserve to continue its bond-buying program at a monthly pace of $85 billion.

In counterpoint to the softness in stocks, US Treasuries rallied for the fourth straight session as investors took a "just in case" attitude.

Yields on the benchmark 10-year note were hovering at 2.63% on Thursday, making a fall of 23 basis points since the Fed decided to maintain its stimulus.

In commodity markets, oil prices were pressured by hints of progress between the US and Iran.

Iranian President Hassan Rouhani said in a newspaper interview on Wednesday that he wants to reach a deal with world powers on Tehran's nuclear program in three to six months.

Brent crude for November delivery fell 13 cents to $108.19, while November US crude lost 28 cents to $102.40 a barrel.

Copper futures were off 0.2% to $7,182.25 per tonne, while gold held overnight gains at $1,331.06 an ounce.