Stocks got a boost yesterday after Japan’s central bank overhauled its stimulus programme as markets awaited the outcome of the Fed’s policy meeting.
Wall Street was in positive territory approaching midday, boosted by a strong earnings report from FedEx and a dividend hike from Microsoft.
In Europe, London’s benchmark FTSE 100 index managed a 0.06% gain after the OECD slashed its growth forecast for Britain owing to the Brexit vote. Frankfurt’s DAX 30 added 0.4% and the CAC 40 in Paris rose 0.5%.
In foreign exchange, the euro hit a three-week low at $1.1123 before recovering.
The yen first tumbled against the greenback, but the dollar weakened as the Fed meeting approached.
“The first of the day’s central bank dramas has gone down well, with the Bank of Japan tinkering with their stimulus package much to the delight of the markets,” said Spreadex analyst Connor Campbell.
Tokyo’s Nikkei stocks index sprang from negative territory to end 1.9% higher after the Bank of Japan said it would try to raise government bond yields as part of its drive to kickstart inflation. Yields on 10-year government bonds briefly broke into positive territory on the news before falling back.
It also said it would continue its huge monetary easing scheme and delayed cutting interest rates further into negative territory - providing some much-needed relief for banks, which have been hammered by the policy introduced earlier this year.
The announcement came at the end of a keenly-awaited meeting and follows a string of weak readings on the economy, which has failed to revive despite three years of bank and government stimulus.
Later in the day, the US Federal Reserve was set to wind up its own policy meeting.
Global markets have suffered severe volatility in the weeks leading up to the gathering, with Fed officials giving contradictory opinions on the need for a rise in interest rates.
While it is not expected to tighten this month, the policy board’s statement will be pored over for clues about its plans for its next meeting in December, or January.
Predictions of tightening US rates and a lack of recent easing from other central banks have stoked debate that the age of easy money – which has helped fuel a rally on global markets – could be ending. This has sparked fears of a painful correction.
But Masayuki Kichikawa, chief macro strategist at Mitsui Sumitomo Asset Management Co in Tokyo, said: “The stock and currency markets are starting to price in the fact the BoJ probably won’t be tapering too easily and they’ll continue to ease. This is slightly positive for risk assets.”
Analyst Jasper Lawler at CMC Markets in London said that “by setting a yield curve target and shying away from cutting interest rates, the Bank of Japan is trying to engineer a profitable environment for banks.”
He suggested the European Central Bank, which has also been pursuing a policy of ultra-low interest rates and massive purchases of bonds, could adopt a similar policy to reduce pressure on banks. Most European banking shares climbed. Commerzbank climbed 3.3% in Frankfurt, while in Paris BNP Paribas rose 2.8% and Societe Generale gained 1.9%.