World shares jump, yen slumps as BOJ expands stimulus

Nikkei jumps almost 5% in its biggest rise since June last year

World shares jumped and the yen fell to a seven-year low against the dollar on Friday as the Bank of Japan surprised financial markets by significantly expanding its massive stimulus programme.

In a rare split decision, the BOJ's board voted 5-4 to accelerate purchases of Japanese government bonds so that its holdings increase at an annual pace of 80 trillion yen ($725 billion), up by 30 trillion yen.

The central bank also said it would triple its purchases of exchange-traded funds and real-estate investment trusts (REITs), while sources said the government's huge pension fund would more than double its holdings of domestic stocks.

For investors, the timing of the moves sent a strong signal, coming right as six years of aggressive US stimulus come to an end and just before euro zone inflation data that is likely to keep the pressure on the ECB to further ease its policy.

Tokyo's Nikkei share index jumped almost 5% in its biggest rise since June last year following the BOJ's move, which it said was a preemptive strike at "a critical moment in the effort to break free from the deflationary mindset" in Japan.

European stocks opened up 1% and US futures prices pointed to similar gains when trading resumes in New York. Stocks were lifted on Thursday by strong third quarter US GDP data and another round of upbeat earnings. 

"What is important today is not only the BOJ action but also the news that the Japanese government's pension fund will be increasing the allocation to Japanese equities," said Alvin Tan, an FX strategist at Societe Generale in London.

"This plus the fact the US stock market appears to be experiencing a v-shaped recovery from the recent sell-off is preparing the ground for a pretty strong 'risk-on' situation until the end of the year."

In frenetic currency market trading, the yen tumbled to its lowest level in nearly seven years against the dollar, putting it on track for its biggest losses in more than a year.

The dollar surged 2% past its Oct. 1 high of 110.09 yen, rising as far as 111.55 yen, the highest since January 2008.

Gareth Berry, a currency analyst with UBS, said the one-two combination from the BOJ and pension fund were likely to propel dollar/yen close to their three-month forecast of 115 yen.

BOJ Governor Haruhiko Kuroda told reporters after its meeting that there was still room for further easing if needed, but the central bank believed Friday's steps were sufficient.

ROUBLE RUMBLES

The moves in Japan created an intense appetite for higher-yielding but riskier assets as investors bet the flood of cheap central bank money would buoy asset prices.

At 0900 GMT, the FTSEurofirst 300 index of top European shares was up 1.3% at 1,344.18 points, extending a sharp two-week rally, while southern European government bonds also made ground. 

Euro zone flash inflation data due at 1000 GMT will provide the next indicator of whether the ECB might feel compelled to step up its support for the bloc's beleaguered economy.

The consensus is for an annual 0.4%, up from a 0.3% in September, but a soft early reading from France and a weaker-than-expected number from Germany on Thursday has the market braced for a potentially lower number.

Those expectations left the euro hovering 0.3% lower at $1.2574 while the dollar index, which surged this week after the Federal Reserve ended its stimulus programme with some confident-sounding rhetoric, was up 0.6%.

There was also intense focus on Russia ahead of a meeting of its central bank at which the market expects a rate hike to combat above-target inflation and a steep slide in the rouble. The decision is expected at around 1030 GMT.

The rouble retreated in early trade, paring some of the huge 5% trough-to-top gain made in the previous session which was its largest on a full trading day since 1999.

"The 5% rouble rally on Thursday potentially revealed some players may well be expecting a 150-200 basis points or more move to calm the FX market," Dmitry Polevoy, chief Russia economist at ING Bank in Moscow, said in a note.