GLOBAL MARKETS-Japanese stocks rally, yen falters as BOJ rate hike bets fade

By Stella Qiu

SYDNEY, Oct 3 (Reuters) - Japanese stocks jumped and the yen fell on Thursday as the risk of further tightening in monetary policy this year faded, while the sizzling rally in Hong Kong's share market took a breather.

The euro was nursing heavy losses as markets ramped up bets that the European Central Bank will cut rates at each of its meetings in October and December after a top policy hawk Isabel Schnabel said she expects inflation will fall back to target.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 1% while the Nikkei surged 2.2% as a weaker yen boosted the outlook for Japanese exporters.

The dollar rose another 0.3% to 146.84 yen, about the highest in a month. It had already jumped 2% overnight as Japan's newly-elected Prime Minister Shigeru Ishiba said that the country was not ready for additional rate hikes, after meeting with the central bank governor Kazuo Ueda.

Ueda also said the central bank would move cautiously in deciding whether to raise rates. Dovish BOJ policymaker Asahi Noguchi also said the BOJ must patiently maintain loose monetary conditions.

"Put together, I guess it is a comprehensive boost for the dollar/yen because for me it has taken rate hikes off the table for 2024... More likely we're talking about next tightening isn't going to be until 2025," said Tony Sycamore, analyst at IG.

"I think dollar/yen is going to be driven by the U.S. side of the equation now. Given the fact we saw some good U.S. jobs data this week - if that turns out to be case for non-farm payrolls tomorrow - the dollar/yen can continue to ratchet up higher towards 149.40 which we saw in mid-August.

Futures imply less than a 50% chance that the BOJ could hike by 10 basis points by December, while rates are only seen climbing to 0.5% by the end of next year, from the current 0.25%.

Elsewhere in Asia, China's mainland markets are closed for a holiday, but Hong Kong's Hang Seng lost 2.5%, having soared 6.2% a day earlier. The benchmark is still up a staggering 30% in just three weeks after China announced a barrage of stimulus measures to revive a faltering economy.

Overnight, Wall Street was mostly flat, though Treasury yields rose after a strong private payrolls report added to evidence of a healthy U.S labour market, lessening the risk of a big downside miss for Friday's non-farm payrolls data.

Bonds this week have been supported by safe-haven flows as geopolitical tensions in the Middle East ratcheted up. Israel said eight of its soldiers were killed in combat in south Lebanon as its forces thrust into its northern neighbour in a campaign against the Hezbollah armed group.

Two-year Treasury yields were little changed at 3.648%, while ten year yields were flat at 3.79%.

Markets imply a 36% chance the Federal Reserve will cut by another 50 basis points in November, compared with almost 60% last week, and have 70 basis points priced in by year-end.

In the foreign exchange markets, the euro sagged at $1.1040, just above key support at $1.10 and not far from Wednesday's low of $1.10325, a level last seen on Sept. 12.

Oil prices rose on worries the escalating Middle East conflict could threaten oil supplies from the world's top producing region. Brent futures rose 1.1% to $74.68 a barrel.

Gold hovered near a record high at $2,655.90 an ounce.

(Reporting by Stella Qiu Editing by Shri Navaratnam)