Stocks jump worldwide as Bank of Japan rate goes negative

Stocks jumped worldwide and the yen slumped on Friday after the Bank of Japan stunned markets by adopting negative interest rates. Also, hopes the Federal Reserve will slow the pace of future US rate hikes also underpinned stock gains.

The Bank of Japan (BOJ) unexpectedly cut a benchmark rate below zero in a bold move to stimulate the Japanese economy. Volatile markets and slowing global growth have threatened the central bank’s efforts to overcome deflation. Equities surged globally, the yen tumbled and sovereign debt rallied after the BOJ said it would charge 0.1 per cent for excess reserves, an aggressive policy pioneered by the European Central Bank. The BOJ said it may cut rates further if necessary.

A sharp braking of US economic growth in the fourth quarter also raised expectations that the Fed will not be able to hike rates four times this year as it has indicated.

US gross domestic product rose at an annualized 0.7 per cent, below an expected 0.8 per cent gain, as a strong dollar and tepid global demand hurt exports.

“Four rate hikes this year is not even a possibility,” said Jason Pride, director of investment strategy at asset manager Glenmede. The GDP data, never a good data point to make economic decisions, was “a good reason for a relief rally,” he said.

The yield on benchmark 10-year Japanese government bonds plunged to a record low of 0.09 per cent, and the yen fell 1.90 per cent against the US dollar to 121.07 yen, its biggest daily decline in more than a year.

The Nikkei share index whipsawed, but closed 2.8 per cent higher. Shares on Wall Street and in Europe rose more than 2 per cent, while MSCI’s all-country world stock index gained 2.06 per cent.

“The BOJ decision was a massive surprise. It’s further money printing from Japan on a massive scale after having told the markets that they’re not doing it,” said Will Hamlyn, investment analyst at Manulife Asset Management. “That triggered European investors to push the ‘risk-on’ button.”

Advisory firm Oxford Economics said Japan’s move, bringing to five the number of central banks that have used negative rates, indicates they are here to stay, though their impact and effectiveness remain to be seen.

The pan-European FTSEurofirst 300 index closed 2.27 per cent higher at 1,348.08. For the month, the index fell 6.2 per cent, its worst January since 2008, but better than a 12 per cent decline at mid-month due to China growth worries.

US stocks surged into the close. The CBOE Volatility index , often called Wall Street’s fear index, fell 12 per cent to close below 20 for the first time since Jan. 6.

The Dow Jones industrial average closed 396.66 points higher, or 2.47 per cent, to 16,466.3. The S&P 500 gained 46.88 points, or 2.48 per cent, to 1,940.24 and the Nasdaq Composite rose 107.28 points, or 2.38 per cent, to 4,613.95.

For the month, the Dow lost 5.5 per cent, the S&P 500 fell 5.1 per cent and the Nasdaq dropped 7.9 per cent, capping its worst January in seven years. For the week, the Dow gained 2.3 per cent, the S&P added 1.7 per cent and the Nasdaq 0.5 per cent.

Euro zone bond yields tumbled, with German yields set for their biggest monthly fall in two years following the BOJ’s surprise move. US Treasury yields fell to four-month lows.