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As Japan Surprises Markets With New Rate Policy, Pressure Mounts on Fed

by Reuters / / Source: Reuters
A Japanese flag flutters atop the Bank of Japan building in Tokyo
A Japanese flag flutters atop the Bank of Japan building in Tokyo, Japan, September 21, 2016. REUTERS/Toru Hanai

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World stocks rose on Wednesday, led by a surge in bank shares, while the yen weakened after the Bank of Japan surprised markets by adopting a target for long-term interest rates.

BOJ Governor Kuroda attends a news conference at the BOJ headquarters in Tokyo
Bank of Japan (BOJ) Governor Haruhiko Kuroda attends a news conference at the BOJ headquarters in Tokyo, Japan, September 21, 2016. REUTERS/Toru HanaiREUTERS

With the global economy showing few signs of rebounding and investors fretting about the limits of major central banks' easing, the BOJ's move came as a welcome relief for markets.

"They've acknowledged the negative rate policy can hurt bank profits, and these measures they've announced today are in a way trying to offset some of that negative impact, "said Michael Moen, fixed income investment manager at Aberdeen Asset Management.

The focus now shifts to the U.S. Federal Reserve policy decision later on Wednesday, with weaker-than-expected economic data prompting investors to call off bets on a rate hike.

Europe's STOXX 600 was up 1 percent in early trading with euro zone banking shares up nearly 3 percent and poised for their best day in more than two months.

This came after the Japanese central bank maintained its 0.1 percent negative interest rate, but abandoned its base money target and instead set a "yield curve control" under which it will buy long-term government bonds to keep 10-year bond yields around current levels of zero percent.

"This is positive for the equity market too, especially bank stocks," said Moen.

Scepticism about the sustainability of Tuesday's moves, however, remains, particularly for the yen, which nevertheless clawed back much of its earlier loss.

"When the dust settles, we think this will be seen as a disappointment. The BOJ may have changed the interim target to the yield curve, but the instruments it is using to hit it are basically unchanged, barring minor tweaks," said Adam Cole, head of G10 FX strategy at RBC Capital Markets.

The U.S. dollar rose as high as 102.78 yen, but in early European trading had slipped back to 101.79 yen.

Futures markets pointed to Wall Street opening up around 0.5 percent, with attention set to switch to the Fed.

Recent hawkish and dovish comments from Fed officials have stoked volatility in financial markets, although consensus is now centered on the Fed raising rates in December.

In commodities, the brighter mood on risky assets saw U.S. crude oil futures up 1.8 percent to $46.71 a barrel.

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