Falling stocks and bruised dollar reel from BOJ’s surprise policy shift

By Nell Mackenzie

LONDON (Reuters) -World stocks slid on Tuesday after a policy tweak by Japan’s central bank rattled investors already worried about the economic fallout of rising interest rates and untameable inflation.

The Bank of Japan (BOJ) widened the allowable band for long-term yields to 50 basis points either side of its 0% target, from 25 basis points previously.

The policy decision caused an immediate spike in the yen, with the dollar index dropping 0.80% to 103.95, a six-month low. US stock futures traded down and slightly flat under 0.25%.

European stock markets hit six-week lows, with the German and French benchmark indices falling by as much as 1%, while London’s FTSE 100 lost as much as 0.8%.

Japanese 10-year government bond yields surged to their highest level since 2014, with euro zone yields following suit. Yields rise when bond prices fall.

Investors have needed time to digest the series of rate hikes delivered last week from central banks including the Bank of England, the European Central Bank and in particular, the U.S. Federal Reserve, said Tatjana Puhan, the deputy chief investment officer at TOBAM, a Paris-based asset management firm.

“Markets didn’t want to believe it, but this move by the BOJ emphasises that central banks remain concerned that inflation will stay higher,” Puhan said.

The BOJ has steadily bought billions of dollars’ worth of government bonds to keep long-term interest rates low, despite a pickup in inflation, both at home and abroad.

“Think of the scenario where we go into a recession and inflation remains higher,” Puhan said. Unsure whether Tuesday’s market moves would have a snowball effect or they were just a temporary shock, over the long term investors should prepare for more downside, she said.

Rising COVID cases that threatened to slow China’s reopening to the rest of the world from nearly three years of lockdowns was also a point of focus for investors, Puhan said, as further lockdowns that might compromise China’s growth would have a lasting effect on the world economy.

“So many US companies produce in China and rely on its supply chain. This can’t be changed overnight,” Puhan said.

However, James Rossiter, head of global macro strategy at TD Securities, said that thin liquidity in today’s markets should be taken into account.

“There has got to be a lot of people on holiday saying, ‘Wait, this wasn’t supposed to happen’,” he said.

Rossiter pointed to BOJ Governor Haruhiko Kuroda’s speech in which he said the policy tweak was “aimed at improving market functions” and was “not an interest rate hike.”

This knocked other currencies from recent gains, with both the euro and pound falling more than 3.5% against the yen.

In turn, the Nikkei benchmark index slumped 2.71% after trading in positive territory earlier in the day, while U.S. stock futures fell between 0.1% and 0.2%, suggesting a modestly weaker start to trading.

In the oil market, Brent crude rose 0.20% to $79.95 per barrel, while U.S. crude rose 1.3% to $76.19.

Spot gold benefited from the weakness in the dollar, rising 1% to around $1,805 per ounce. [GOL/]