European stocks edge higher as markets digest BoJ policy shock

Stocks climbed on Wednesday and global bond markets steadied following a heavy sell-off sparked by the Bank of Japan’s surprise decision to relax its policy of pinning yields close to zero.

The Stoxx Europe 600 index was 0.9 per cent higher midway through the European trading session, rebounding from a small loss the previous day. On Wall Street, futures pointed to a gain of 0.4 per cent for the S&P 500 and 0.3 per cent for the tech-heavy Nasdaq.

The gains came as stability returned to government bonds, which on Tuesday were rocked by the BoJ’s announcement that it would allow 10-year Japanese yields to climb as high as 0.5 per cent, compared with 0.25 per cent previously.

US 10-year Treasury yields were little changed at 3.69 per cent, having earlier touched a three-week high of 3.71 per cent, despite a continued sell-off in Japanese government debt. German yields were also steady, while UK bond yields were marginally higher, adding to Tuesday’s sharp rise.

While BoJ governor Haruhiko Kuroda stressed that the move was not a shift away from Japan’s ultra-loose monetary policy, investors sensed a crack in the central bank’s resolve to stand apart from the global dash to higher interest rates.

“The BoJ has taken a first step toward tighter monetary policy,” said Ulrich Leuchtmann, currency strategist at Commerzbank.

The yen was marginally weaker on Wednesday at 131.95 to the dollar, following a rise of nearly 4 per cent on Tuesday.

The currency is likely to rise further as Japanese investors sell dollar holdings to buy Japanese debt, drawn by the rise in yields, said George Saravelos, strategist at Deutsche Bank.

“The BoJ policy shift (despite Governor Kuroda’s claims to the contrary) should start to put the Japanese wall of money to work,” Saravelos said. “There is a lot to move.”

The BoJ’s decision came after US Federal Reserve chair Jay Powell said there was “more work to do” in taming US inflation after lifting interest rates last week, while Christine Lagarde, president of the European Central Bank, said it was “not done” raising rates.

“The Fed, ECB and BoJ have all delivered hawkish surprises over the past week,” said Steve Englander, head of G10 FX research at Standard Chartered, pointing out that recent moves by the world’s most influential central banks had added a “risk-off flavour” to markets heading into the Christmas period.