Japanese stocks jump, yen weakens as BOJ overhauls policy

By Saikat Chatterjee

HONG KONG (Reuters) - Japanese stocks rallied and the yen weakened in a volatile session on Wednesday after the Bank of Japan decided to adopt a target for long-term interest rates in an overhaul of its massive monetary stimulus programme.

The BOJ maintained its 0.1 percent negative interest rate, but 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.

Financial markets gave the announcement an initial thumbs up with MSCI's broadest index of Asia-Pacific shares outside Japan extending its gains to be up 0.35 percent on the day compared to 0.23 percent earlier.

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

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

"Clearly, there was a change in policy framework, which was a surprise," said Yasutoshi Nagai, chief economist at Daiwa Securities. "It's not clear what they think about an exit strategy."

In bond markets, U.S. Treasury yields spiked higher immediately after the decision, as investors apparently seem to believe 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 percent compared to 1.69 percent before the BOJ announcement, though investors were wary of driving them higher before a U.S. Federal Reserve policy decision later in the global day.

Both hawkish and dovish comments from Fed officials recently have stoked volatility in financial markets, although consensus is now centred on a U.S. 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 the yen weakness might 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 percent 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 percent in a week.

Oil prices held early gains with U.S. crude oil futures up 1.7 percent to $44.77 per barrel. [O/R]

(Additional reporting by Lisa Twaronite in TOKYO; Editing by Shri Navaratnam)