BoJ stimulus boosts dollar and sends S&P 500 to new record

The Bank of Japan stunned global markets on Friday and sent the dollar soaring as it unexpectedly expanded its stimulus programme just days after the US Federal Reserve ended its own historic experiment with easy money.

The dollar jumped as much as three per cent against the yen, prompting a similar decline in the gold price, while equity markets around the world surged. The S&P 500 hit a new record close and the Nikkei 225 index rose nearly 5 per cent.

Aggressive moves by central banks to bring down borrowing costs have propelled equities, bonds and real estate sharply higher since the global financial crisis. While the Fed has steadily withdrawn its stimulus this year, and ended it on Wednesday, the move by the BoJ and expectations of a more aggressive approach from the European Central Bank are boosting markets that were briefly rattled earlier this month.

Haruhiko Kuroda, BoJ governor, defied objections from four fellow board members, arguing that a tax-hit economy and a lower oil price have led to "a critical moment" in the effort by the world's third-largest economy to escape 15 years of deflation.

He added: "There was a risk that despite having made steady progress, we could face a delay in eradicating the public's deflation mindset."

The BoJ plans to expand the monetary base by some Y80tn a year, mainly by stepping up purchases of longer-term Japanese government bonds. That is up from a current annual pace of about Y60tn-Y70tn ($539bn-$629bn).

"It shows how other central banks are being forced into the breach left by reduced Fed stimulus, either pre-emptively as in this case, or in the future forced by market stress," said Alan Ruskin, strategist at Deutsche Bank.

While the BoJ cannot replace the heavy lifting done by the Fed, Mr Ruskin said the move will probably propel a "melt-up" for risk assets into the end of the year, led by the S&P 500 and now the Nikkei 225 index.

"For central banks [such as the BoJ and the European Central Bank], with monetary policy at the zero bound, there is no Plan B," said Nick Gartside, JPMorgan Asset Management's fixed income chief investment officer.

Market reaction was dramatic, with the dollar hitting a new seven-year high against the yen and a trade-weighted measure of the US currency rising 1 per cent to its highest point since June 2010.

But the dollar's strength weighed heavily on a range of commodities, sending the price of everything from gold to oil lower. Gold tumbled to the lowest level since August 2010 at $1,165.41 an ounce

Analysts and investors have long argued that the dollar is set to embark on a long period of appreciation as the US economy continues to recover from the financial crisis and the Fed shifts its focus to raising interest rates.

The improvement in the US contrasts with the ongoing economic weakness of Europe and Japan. Analysts expect that the ECB may eventually be forced to start its own bond-buying or quantitative easing programme, which would weigh on the euro - the dollar's main trading counterpart.

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