Picture: REUTERS
Picture: REUTERS

HONG KONG — Japanese stocks rallied and the yen weakened in volatile trade on Wednesday after the Bank of Japan left its 0.1% interest rate unchanged.

Financial markets initially welcomed a surprise change in the bank’s policy as it adopted a target for long-term interest rates in an overhaul of its monetary stimulus programme.

The BoJ 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.

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MSCI’s broadest index of Asia-Pacific shares outside Japan extending its gains, ending 0.35% on the day compared with 0.23% earlier.

The Nikkei swerved in and out of the red soon after the central bank announced its policy decision, and was last up more than 1%, while the Topix gained 1.7% after the central bank said 2.7-trillion of its ETF purchases will be linked to the index.

Volatility was especially acute in currency markets with the yen weakening by as much as 1.2% against the dollar in choppy trade.

Yasutoshi Nagai, chief economist at Daiwa Securities, said the policy change was a surprise. "It’s not clear what they think about an exit strategy."

In bond markets, US Treasury yields spiked higher immediately after the decision, with investors appearing to think the BoJ’s move to steepen the yield curve will have a ripple effect on other bond markets.

Benchmark 10-year Treasury notes rose to 1.73%, compared with 1.69% before the BoJ move, but investors were wary of driving them higher before the US Federal Reserve decision on interest rates later on Wednesday.

Hawkish and dovish comments from Fed officials recently have stoked volatility in financial markets, although consensus now favours a US rate hike by year-end.

In currency markets, dollar/yen spiked higher as investors rushed to cover their short positions with the yen extending its weakness against the dollar to trade at 102.45 "Many people expected the BoJ not to take any action at all, and the yen to strengthen, so we now see many people buying the dollar back," said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo.

Sean Callow, senior currency analyst at Westpac, expects yen weakness to prove short-lived.

"They do seem open to fresh ideas. But it is hard to see the initial gains in USD/JPY being sustained. Keeping the depo rate at -0.1% and not boosting asset purchases doesn’t seem a recipe for yen depreciation," he said.

The Australian dollar slipped to $0.7545 as the demand outlook for industrial metals for China continued to improve along with favourable tailwinds from emerging markets and currencies. It is up 1.5% in a week.

Oil prices held early gains with US crude oil futures up 1.7% to $44.77 a barrel.