By Vikram Subhedar
LONDON (Reuters) - World stocks rose on Wednesday, led by a surge in bank shares, after the Bank of Japan overhauled its monetary policy to target interest rates, though the yen recovered initial losses against the dollar on scepticism those moves would stoke inflation.
With the global economy showing few signs of rebounding and investors fretting about the limits of monetary easing by major central banks, the BOJ's move initially came as a welcome relief for markets, particularly financial sector shares.
Investors' focus now shifts to the U.S. Federal Reserve policy decision later on Wednesday. Expectations of a rate increase have all but evaporated after some weak economic data, and Wall Street looked set to follow Europe higher.
Europe's STOXX 600 rose 1 percent as euro zone banking shares rallied nearly 3 percent. The bank shares were poised for their best day in more than two months.
Futures on Wall Street were up 0.4 percent.
The BOJ maintained its 0.1 percent negative interest rate, but abandoned its base money target. Instead, it set a "yield curve control" under which it will buy long-term government bonds to keep 10-year bond yields around their current zero percent.
"The fact that the flattening of the yield curve has gotten to a point where it has elicited a policy response could mark the beginning of the end of quantitative easing," said Michael Metcalfe, head of global macro strategy at State Street Global Markets.
"Just as interest rates have reached their lower bound, asset purchases, in government bonds at least, may have reached their upper bound. Other central banks, the ECB especially, will take close note."
A similar move would solve many of the European Central Bank's own problems but would probably pose even more, making the policy difficult to emulate.
MINOR TWEAKS
Doubts about the sustainability of the market's moves crept in quickly, particularly for the yen, which reversed direction against the dollar hours after the BOJ decision.
"Markets seem a bit confused by today, and rightly so," said Aberdeen Asset Management investment manager James Athey. The fact that the BOJ is trying to overshoot an inflation target it has struggled to hit has raised eyebrows, Athey said.
"The Bank has effectively told markets that it has a royal flush, and the markets are questioning Kuroda's poker face," he said.
The U.S. dollar rose as high as 102.78 yen, but had slipped back to 101.36 yen by midday in Europe.
Government bond yield curves, which measure borrowing costs across different maturities, initially steepened in response to the BOJ's moves, but the impact quickly waned.
Japanese 10-year yields rose as high as 0.005 percent, turning positive for the first time since March, but last traded at -0.035 percent, up 2.5 basis points.
German 10-year benchmark yields last stood at -0.01 percent, up 0.4 bps on the day
In commodities, the brighter mood on risky assets saw U.S. crude oil futures rise 1.8 percent to $46.71 a barrel.
Spot gold rose 0.4 percent to $1320.30 an ounce, and further gains are expected if the Fed holds back from a rate increase.
(Additional reporting by Jamie McGeever,; Editing by Larry King)
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