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Investors were treading cautiously early Friday in Asian markets ahead of a key Bank of Japan policy decision, with expectations for aggressive easing running high.

The Nikkei Stock Average fell 0.6% as the yen strengthened sharply against the U.S. dollar, with the currency pair falling to as low as 103.30 from 105.20 in early Asia trade. It was last at 103.974.

"It all depends on what the BOJ does today," said Tim Condon, ING's chief Asia economist. "If they surpass expectations and the yen depreciates it's risk on, which is bullish for all Asian equity markets and currencies. If they disappoint, it's bearish for equities and currencies."

Data released Friday showed that Japan inflation stayed far below the Bank of Japan's 2% target. Consumer prices fell at the fastest pace since June 2013, adding to BOJ pressures to announce easing later Friday.

"A very ugly setting was presented for [BOJ Gov. Haruhiko] Kuroda to make his BOJ policy statement today as…Japan's inflation reading came in at its fourth consecutive deflationary read," said Gavin Parry, managing director at Parry International Trading.

Meanwhile, Japan's unemployment rate fell to 3.1% in June from 3.2% the previous month.

Elsewhere in the region, Australia's S&P ASX/200 was trading 0.1% lower, while the Seoul Kospi was up 0.3%. Hong Kong's Hang Seng Index fell 0.7%, and the Shanghai Composite was trading up 0.1%. In Taiwan, the Taiex was down 0.7%, giving up the previous day's gains in the shares of mobile phone component makers, triggered by strong earnings from Samsung Electronics Co. Ltd. and Apple Inc. earlier in the week.

Other Asian currencies were also appreciating on Friday. The South Korean won opened at a nine-month high versus the dollar, tracking the yen's strengthening to a two-week high.

Analysts say BOJ expectations are sky high, meaning the Asian markets and, in particular, the yen, could react sharply on even the slightest disappointment.

Conversely, BOJ's Mr. Kuroda is known for his surprises, and markets may take off on word of some extraordinary measure.

In the oil markets, the price of Brent crude slightly recovered in Asia trade to trade up 0.1%.

Eleanor Warnock and Ewen Chew contributed to this article.

Write to Kenan Machado at kenan.machado@wsj.com and Ese Erheriene at ese.erheriene@wsj.com

(END) Dow Jones Newswires

July 28, 2016 23:15 ET (03:15 GMT)

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