World stock markets rebounded Friday, ending a highly volatile month with a bang after the Bank of Japan unexpectedly slashed interest rates into negative territory for the first time.
Equities in Asia and Europe rallied as traders seized on the BoJ’s announcement that it would charge banks to hold their cash, in news that also sent the yen tumbling.
The Bank of Japan’s unprecedented decision to adopt a below-zero interest rate mirrors the European Central Bank (ECB) and the Swiss National Bank (SNB (LSE: 0QKG.L – news) ) — which both first unveiled negative rates in 2014.
The policy is the BoJ’s latest weapon as it looks to spur lending — and after the news, Tokyo’s Nikkei stock index soared almost three percent and the yen plunged.
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Japan’s central bank launched the new policy as part of its long-running fight against anaemic economic growth and deflation.
BoJ chief Haruhiko Kuroda also cited recent markets turmoil and a China slowdown for ushering in a -0.1 percent rate on new reserves, and said it may go further into negative territory. Rates currently are near zero.
– ‘A welcome lift’ –
“The surprise decision by the Bank of Japan to join the SNB and the ECB in cutting rates into negative territory has given markets in Asia and here in Europe a welcome lift into the weekend, and as such is likely to translate into a positive US open as well,” said CMC Markets analyst Michael Hewson.
The move aims to give Japanese banks an incentive to boost lending, which in turn should help fuel economic growth.
Policymakers hope that putting more cash in shoppers’ wallets will spur spending and move Japan closer to the bank’s 2.0-percent inflation goal.
Lower interest rates tend to be positive for stock markets because they make equities a more attractive asset for investors, while boosting liquidity and hopes of economic growth.
Trading floors across the world have been awash with red in January as investors endured one of the worst starts to a year in recent history, with markets hit by China’s economic crisis, weak global growth and crashing oil prices.
Some stability seemed to be established over the past week, however, on hopes that the BoJ and ECB would further ramp up their stimulus.
The BoJ also warned Friday over the negative impact of the economic crisis gripping key trading partner China — a crucial driver of global growth — and said it was prepared to cut rates further below -0.1 percent “as necessary”.
– ‘Twitchy’ over economy, deflation –
“The Bank of Japan’s move shows how twitchy policy makers are getting about faltering global growth and the potential for deflationary pressures to get out of control,” said analyst Laith Khalaf at stockbroker Hargreaves Lansdown (LSE: HL.L – news) .
“There’s nothing like a bit of loose monetary policy to get stock markets excited, and true to form, global indices have reacted positively to the news.”
Japan’s Nikkei stock index soared more than three percent at one point, before ending 2.8 percent higher.
The yen fell to a five-week low at 121.42 against the dollar in earlier Asian trading hours, compared to 118.60 before the announcement.
Official data showed Friday that the Japanese inflation rate came in at 0.5 percent in 2015, way below target.
Japan has suffered from years of deflation and Tokyo’s efforts to pump up the economy have had limited results so far.
?This is a list ditch attempt to inject some inflation back into the Japanese economy,” added Nour Al-Hammoury, chief market strategist at ADS Securities.
Elsewhere in Asia, Hong Kong soared 2.5 percent and Shanghai surged 3.7 percent.
Before Friday’s rally, Shanghai’s benchmark index had endured its worst month since 1994 as dealers fret over the state of the Chinese economy and authorities’ ability to handle the crisis. The index ended January as the world’s worst performer.
– Key figures at 1145 GMT –
London – FTSE 100: UP 0.9 percent at 5,982.9 points
Frankfurt – DAX 30: UP 0.5 percent at 9,683.5
Paris – CAC 40: UP 0.7 percent at 4,350.4
EURO STOXX 50: UP 0.8 percent at 3,002.3
Tokyo – Nikkei 225: UP 2.8 percent at 17,518.30 (close)
Shanghai – Composite: UP 3.1 percent at 2,737.60 (close)
Hong Kong – Hang Seng: UP 2.5 percent at 19,683.11 (close)
New York – Dow: UP 0.8 percent at 16,069.94 (close)
Euro/dollar: DOWN at $ 1.0917 from $ 1.0941 Thursday
Euro/yen: UP at 131.82 yen from 130.00 yen
Dollar/yen: UP at 120.75 yen from 118.82 yen
