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World shares bounce, yen slides after landmark BOJ shift

NEW YORK/LONDON, March 20 ------ Global shares edged higher and the yen slid past 150 to the dollar after the Bank of Japan met market expectations by ending eight years of negative interest rates, likely the highlight of a busy week for central banks. Investors will now turn their focus to the U.S. Federal Reserve's monetary policy meeting that ends on Wednesday, when the central bank is expected to provide further clues about the pace at which it will likely lower interest rates this year.  


Financial markets are now considering the chance that the Fed might reduce the number of projected rate cuts this year to two from three on the back of last week's stronger-than-expected inflation data. "We don’t think the Fed will fundamentally change its outlook for inflation based on two hotter than desired prints to start the year," said Christopher Hodge, chief economist at Natxis CIB Americas. "However, we do expect a slightly more hawkish tone in the hopes of keeping a leash on financial conditions." 


MSCI's world share index (.MIWD00000PUS), opens new tab was little changed, and hovered near all-time highs. Stocks on Wall Street reversed earlier losses, with the Dow Jones Industrial Average (.DJI), opens new tab rising 0.83%, the S&P 500 (.SPX), opens new tab gaining 0.56%, and the Nasdaq Composite (.IXIC), opens new tab adding 0.39%. The U.S benchmark 10-year Treasury yield was down 4.8 basis points to 4.293%, from 4.34%.  


The day's big news was in Japan, where the BOJ heralded a new era as it shifted away from years of ultra-easy monetary policy. It also abandoned bond yield curve control and dropped purchases of riskier assets, including exchange-traded funds. Japan's Nikkei (.N225), opens new tab was choppy after the decision but closed 0.66% higher, buoyed by the weaker yen, while Japanese government bond yields fell. The dollar rose 1.15% to 150.88 yen against the Japanese yen. "The BOJ clearly has been very, very keen to manage this process so that it is not disruptive,” said David Mitchinson, fund manager at Japan focused Zennor Asset Management. “The markets have front-run them and anticipated their move.” Though the shift was Japan's first interest rate hike in 17 years, it still keeps its rates stuck around zero as a fragile economic recovery forces the central bank to go slow on further rises in borrowing costs, analysts say, giving the rate-sensitive yen little traction. 


In a statement announcing its decision, the BOJ said it would keep buying "broadly the same amount" of government bonds as before. "So some of that spread closure between Japan and the U.S. isn’t quite really happening at the moment because although Japan has hiked a little, the U.S. hasn’t cut,” said Mitchinson, pointing to the fact that U.S. inflation pressures have been stronger than expected. 


BOJ Governor Kazuo Ueda said in his press conference that accommodative financial conditions would be maintained for the time being and the pace of further hikes would depend on the economic and inflation outlooks. 

European shares were fairly muted, with the STOXX 600 (.STOXX), opens new tab and euro zone bond yields little changed.  




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