By Marc Jones
LONDON (Reuters) - A lack of fresh stimulus from the Bank of Japan sent the yen soaring and world stocks into the red on Thursday, half a day after the U.S. Federal Reserve signalled it too was hitting the policy pause button.
The yen surged almost 3 percent against both the dollar and the euro in a sharp reaction to the BOJ inaction, putting it on course for its biggest jump against the greenback since February and in five years against the euro.
Tokyo's Nikkei had slumped 3.6 percent by the time it closed and the pan-European FTSEurofirst 300 dropped 0.6 percent. Disappointing earnings from plane maker Airbus and Spain's second biggest bank BBVA added to the gloom.
The BOJ's decision to hold steady in the face of soft global demand and a rise in the yen was particularly jarring for markets after media reports ahead of the meeting said it wanted to go deeper into negative interest rates.
On the key element of the speculation, applying sub-zero rates to the BOJ's main bank lending programme, governor Haruhiko Kuroda spelled it out clearly.
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"I know such a programme is adopted by the ECB (European Central Bank) ... At this stage, we don't have any plans to consider this option. This wasn't discussed at today's meeting," he said.
"The market was expecting something from the BOJ and they did not deliver so the market has basically wiped out all the rally in dollar/yen of the last couple of weeks," said Societe Generale FX strategist Alvin Tan.
"For the last 2-3 years the big theme in the market was monetary divergence. But in the last few months the legs have really been cut off that... so currencies are all over the place."
KIWI FLIES, GOLD SHINES
The New Zealand dollar was rallying hard too, up almost 2.5 percent, after the Reserve Bank of New Zealand (RBNZ)also wrongfooted traders by skipping a chance to cut its interest rates again.
In bond markets, the flight from the volatility elsewhere and the growing sense that U.S. rates are staying put for a good while longer, overcame the Japanese angst to push benchmark Bund and Treasury yields lower.
"The Fed didn't mention June at all, meaning that if they skip that, it will be September which is close to the election, so we are talking December now," said Soeren Moerch, head of fixed income trading at Danske Bank. "That is a very big relief for fixed income markets."
There was a smattering of encouraging news too from Germany as unemployment remained at a record low in April and the head of Volkswagen said its first quarter sales had been encouraging despite its diesel emissions scandal.
Commodity markets were having a remarkably quite day by their recent standards considering all the currency turbulence going on.
Brent crude was barely budged from 2016 highs hit on Wednesday at $47.19 per barrel as U.S. West Texas Intermediate (WTI) hovered at $45.30 a barrel. Oil has surged 65 percent since mid-January.
Gold, meanwhile reversed overnight losses to climb to $1,255 an ounce, its highest level in a week as traders took advantage of the fall in the dollar, the shiny stuff's underlying currency.
"The longer the Fed holds off on raising rates, the better for gold," said HSBC analyst James Steel.
(Additional reporting by John Geddie Editing by Jeremy Gaunt)