Bank of Japan stuns markets with move to expand quantitative easing

The Bank of Japan stunned global markets yesterday and sent the dollar soaring as it unexpectedly expanded its stimulus programme just days after the US Federal Reserve ended its own historic experiment with easy money.

The dollar jumped as much as 3 per cent against the yen, while the price of gold fell sharply. Equity markets around the world surged, led by a nearly 5 per cent rise in the Nikkei 225 index.

Aggressive moves by central banks to bring down borrowing costs have propelled equities, bonds and real estate sharply higher since the global financial crisis. While the Fed has steadily withdrawn its stimulus this year, and ended it on Wednesday, the move by the BoJ and expectations of a more aggressive approach from the European Central Bank (ECB) are boosting markets that were briefly rattled last month.

Defying objections

Haruhiko Kuroda

, BoJ governor, defied objections from four fellow board members, arguing that a tax-hit economy and a lower oil price had led to “a critical moment” in the effort by the world’s third-largest economy to escape 15 years of deflation.

He added: “There was a risk that despite having made steady progress, we could face a delay in eradicating the public’s deflation mindset.”

The BoJ plans to expand the monetary base by some Y80 trillion (€569 billion) a year, mainly by stepping up purchases of longer-term Japanese government bonds, up from a current annual pace of about Y60-Y70 trillion .

"It shows how other central banks are being forced into the breach left by reduced Fed stimulus," said Alan Ruskin, strategist at Deutsche Bank. While the BoJ cannot replace the heavy lifting done by the Fed, Mr Ruskin said the move was likely to propel a "melt- up" for risk assets into the end of the year, led by the S&P 500 and now the Nikkei 225 index.

"For central banks [such as the BoJ and the ECB], with monetary policy at the zero bound, there is no plan B," said Nick Gartside, JPMorgan Asset Management's fixed-income chief investment officer.

Market reaction was dramatic: the dollar hit a seven- year high against the yen and a trade-weighted measure of the US currency rose to its highest point since June 2010.

But the dollar’s strength weighed heavily on commodities, sending prices of everything from gold to oil lower. Gold fell to $1,161 an ounce, its lowest since August 2010. – Copyright The Financial Times Limited 2014