* Japan stocks lift Asia after BOJ overhauls policy
* BOJ targets long term interest rate, sends yen lower
* Dollar eyes Fed decision later in day
* USD/JPY + 0.8 percent, EUR/JPY + 0.7 percent
By Saikat Chatterjee
HONG KONG, Sept 21 Japanese stocks rallied and
lifted Asian equities on Wednesday, while the yen weakened after
the Bank of Japan surprised markets by adopting a target for
long-term interest rates in an overhaul of its massive monetary
With the global economy showing few signs of rebounding and
investors fretting about the limits of major central banks'
easings, the BOJ's move came as a welcome relief for risk asset
The Japanese central bank 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. and
The BOJ also said it will allow inflation to overshoot its
target by maintaining an ultra-loose policy - beefing up its
previous commitment to keep policy easy until the target was
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 0.5 percent on the
day compared to 0.23 percent earlier.
Late gains in Asian markets are expected to ripple over
into European shares with futures pointing to mild gains in
major stock markets.
"Certainly this is positive for the equity market too,
especially bank stocks," said Michael Moen, fixed income
investment manager at Aberdeen Asset Management.
"Clearly, they've acknowledged the negative rate policy can
hurt bank profits, and these measures they've announced today
are in a way trying to offset some of that negative impact."
The Nikkei swerved in and out of the red soon after
the BOJ policy decision was announced and was last up more than
1.8 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.
"It does give somewhat of an impression of further easing,
targeting the 10-year yield at zero and setting a yield curve
target," said Ayako Sera, market economist at Sumitomo Mitsui
"Overall, that does seem like an easing, but we really don't
know if it will have the actual impact of an easing on the
market, and it will take some time to find out."
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 102.53
The euro surged 0.7 percent to 114.25 yen after
earlier dropping as low as 112.50, its lowest since Aug. 16.
"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.
Oil prices held early gains with U.S. crude oil futures
up 1.9 percent to $44.93 per barrel.
(Additional reporting by Lisa Twaronite in TOKYO; Editing by