NEW YORK Stocks jumped worldwide and the yen slumped on Friday after the Bank of Japan stunned markets by adopting negative interest rates, while hopes the Federal Reserve will slow the pace of future U.S. rate hikes also underpinned stock gains.
The BOJ unexpectedly cut a benchmark rate below zero in a bold move to stimulate the Japanese economy as volatile markets and slowing global growth threaten the central bank's efforts to overcome nagging deflation.
Equities surged globally, the yen tumbled and sovereign debt rallied after the BOJ said it would charge 0.1 percent for excess reserves and may cut rates further if necessary, an aggressive policy pioneered by the European Central Bank.
A sharp braking of U.S. economic growth in the fourth quarter raised expectations that the Fed will not be able to hike rates four times this year as it has indicated it expects.
U.S. gross domestic product rose at an annualized 0.7 percent, below an expected 0.8 percent gain, as a strong dollar and tepid global demand hurt exports.
"Four rate hikes this year is not even a possibility," said Jason Pride, director of investment strategy at asset manager Glenmede. The GDP data, never a good data point to make economic decisions, was "a good reason for a relief rally," he said.
The yield on benchmark 10-year Japanese government bonds plunged to a record low of 0.09 percent, and the yen fell 1.87 percent against the U.S. dollar to 121.03 yen, on track for its biggest daily decline in over a year.
The Nikkei share index whipsawed, but closed 2.8 percent higher. Shares on Wall Street and in Europe rose around 2 percent, while MSCI's all-country world stock index gained 1.73 percent.
"The BOJ decision was a massive surprise. It's further money printing from Japan on a massive scale after having told the markets that they're not doing it," said Will Hamlyn, investment analyst at Manulife Asset Management. "That triggered European investors to push the 'risk-on' button."
Advisory firm Oxford Economics said Japan's move, bringing to five the number of central banks that have used negative rates, indicates they are here to stay, though their impact and effectiveness remain to be seen.
The pan-European FTSEurofirst 300 index closed 2.27 percent higher at 1,348.08. For the month, the index fell 6.2 percent, its worst January since 2008, but better than a 12 percent decline at mid-month due to China growth worries.
The Dow Jones industrial average rose 295.13 points, or 1.84 percent, to 16,364.77. The S&P 500 gained 34.09 points, or 1.8 percent, to 1,927.45 and the Nasdaq Composite added 71.72 points, or 1.59 percent, to 4,578.39.
Euro zone bond yields tumbled, with German yields set for their biggest monthly fall in two years following the BOJ's surprise move. U.S. Treasury yields fell to four-month lows.
Germany's 10-year Bund yield fell 6.5 basis points to 0.26 percent, its lowest since late last April. The 37-basis-point decline in January was its biggest monthly drop since May 2012.
Benchmark 10-year notes were last up 17/32 in price, pushing their yield down to 1.9261 percent after sliding to 1.91 percent, the lowest since Oct. 2.
The euro fell to a session low against the dollar after the U.S. GDP report, dropping 1.0 percent to $1.0828.
The dollar index, tracking the dollar against a basket of major currencies, rose 1.1 percent to 99.594.
Oil hit $35 a barrel, marking a gain of about 25 percent from 12-year lows seen earlier in January, on prospects that a deal between major exporters to cut production could help reduce one of the worst oil gluts in history.
Brent futures settled 85 cents higher at $34.74 a barrel, while U.S. futures rose 40 cents to settle at $33.62.
(Editing by Bernadette Baum and James Dalgleish)