Asian stocks surrendered early gains in chaotic trade on Thursday and the yen surged against the dollar after the Bank of Japan defied market expectations for more monetary stimulus even as prices slipped deeper into deflationary territory.
The near 3 percent fall in dollar/yen was its biggest daily drop since August 2015 and the second biggest in five years, while the yen’s gain against the euro was the biggest in five years.
European shares were seen opening lower, weighed down by weaker commodity prices and the late pullback in Asia.
MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was up 0.2 percent by mid-afternoon after rising as much as 0.5 percent prior to the BOJ decision.
Asian markets were broadly a sea of red, with Japan’s Nikkei .N225 tumbling 3.6 percent.
The BOJ’s decision to hold policy steady in the face of soft global demand and an unwelcome rise in the yen has quickly become the market event of the week, overshadowing the U.S. Federal Reserve’s decision on Wednesday to keep policy unchanged.
“The decision came as an utter surprise. I thought the BOJ would ease further today to accelerate the yen trend which had been weakening on expectations for further easing,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.
Along with keeping policy unchanged, the BOJ cut its inflation forecasts. It also pushed back the timing for hitting its 2 percent price target by six months, saying it may not happen until March 2018 at the latest.
Data earlier showed consumer prices in Japan fell in March at the fastest pace in three years and household spending declined at the fastest pace in a year.
The BOJ’s move derailed demand for risky assets which was fanned overnight after the Fed showed little sign it was in a hurry to tighten monetary policy.
Some of the biggest reaction to the BOJ’s decision took place in the currency markets. By midafternoon, the yen hit a 10-day high of 108.25.
The euro retreated more than 2 percent to 123.31 yen EURJPY=R on the day as short yen positions got washed out.
“It was inevitable that the yen regained all the losses made on easing expectations. Sure, the market was disappointed, but that does not mean the yen will keep gaining,” said Koji Fukaya, president of FPG Securities in Tokyo.
With two of the world’s major central banks unwilling to add to policy stimulus, government bond yields may have marked a bottom for now.
Both 10-year U.S. Treasury yields US10YT=RR and Japanese bond yields JP10YT=RR were higher on the day.
U.S. crude futures CLc1 were down 0.2 percent at $45.17 a barrel, after hitting their 2016 high of $45.62 following the Fed’s decision. Brent LCOc1 also rose to the highest for this year at $47.45, but shed 0.3 percent in Asian trade to $47.04. [O/R]
Earlier in the session, the Reserve Bank of New Zealand kept its benchmark interest rate unchanged at 2.25 percent, but reiterated further easing may be needed given weak inflation.
An index of high yield debt (HYG) consolidated gains after hitting its highest levels in more than five months while S&P index futures ESc1 turned lower on the day.