By Tom Westbrook

SINGAPORE (Reuters) -Japanese markets were reeling on Friday, with the heading for its biggest weekly drop in a year while bonds have been battered and the yen is eyeing its largest weekly gain in five months, as investors rushed out of bets on Japan's rates staying low.

Beyond Japan, the MSCI's broadest index of Asia-Pacific shares ex-Japan bounced 0.8% and Treasuries were sold down slightly. The Nikkei was down 1.8% on the day, for a weekly drop of 3.6%, with exporters such as automakers falling hardest. ()

Other moves were more modest as traders waited on U.S. labour data due later in the day.

The yen leapt more than 2% on Thursday and was well-supported on Friday as short sellers fear that a long-awaited rally may have finally begun.

The yen hit its strongest on the dollar in four months at 141.6 on Thursday and steadied at 144 to the dollar on Friday, having gained about 5% in three weeks. [FRX/]

"The direction is not a surprise," said (NYSE:)'s Tokyo branch manager Bart Wakabayashi. "But this move and the speed of this move have blown away my expectations."

In the past year the Bank of Japan has twice widened and then relaxed its tolerance band for 10-year yields and on Thursday Governor Kazuo Ueda said an "even more challenging" year is ahead, which traders took as a sign of change in the offing. The BOJ is due to set policy rates on Dec. 19.

"The importance of the meeting on December 18-19 has increased, and we judge it's fair to call December's meeting as a 'live' meeting," Nomura analysts said in a note.

Japan's bond market remained under pressure, with yields higher along the curve and the shorter end tracking towards its sharpest weekly selloff since the onset of the pandemic in March 2020. [JP/]

Data showing Japan's economy fell faster than first estimated in the third quarter, as the household sector faced harsher headwinds, complicates the central bank's outlook, and prompted a paring of gains for the yen and of losses for JGBs.

PAYROLLS

In broader markets, since U.S. jobless claims met expectations, the focus is on whether non-farm payrolls figures will reflect signs that the job market is slowing.

Economists expect 180,000 jobs were added last month and an upside surprise may unleash a strong reaction if traders dial back bets on more than 125 basis points of Fed rate cuts next year.

"If the Fed is going to cut aggressively, it will be due to a recession and a notable drop in inflation led by unemployment. The numbers game of NFP (non-farm payrolls) suggests we are still far from those levels," said BNY Mellon (NYSE:)'s head of markets strategy and insights, Bob Savage.

Shares in Australian gas producer Santos rose 6% on news it was in talks with larger rival Woodside (OTC:) about a merger. Woodside shares fell 0.5%.

In currency trade, the yen's surge has the set to end the week steady at 103.62. The euro was lower for the week at $1.0785.

The Australian dollar, weighed by a slowing economy and traders' perception that the central bank is turning dovish, was set to snap a three-week winning streak with a 0.9% drop this week to $0.6613. [AUD/]

futures touched a five-month low on Thursday, before recovering slightly to $75.17 a barrel in Asia trade. Oil is set for a 4.6% fall this week. [O/R]

Gold, having touched a record high early in the week before recoiling, was clinging on at $2,032 an ounce.

is eying an eighth consecutive weekly gain on expectations that U.S. interest rates have peaked and anticipation that a bitcoin ETF might be approved. It last bought $43,437.