Marc Jones London

World shares hit a new 20-month high yesterday after Japan launched its boldest attempt yet to lift its stagnant economy, though the gains were cropped by a flare-up of concerns about Germany’s banks.

The Bank of Japan (BoJ), which has been under political pressure to overcome deflation and generate growth, hiked its inflation target to 2 percent and said that from next year it would adopt an open-ended commitment to buy assets to ease monetary conditions.

Governor Masaaki Shirakawa and six of nine board members voted for a 2 percent inflation target, to be achieved “at the earliest possible time”, a pace not sustained in Japan since the early 1990s. While judging that the economy was “relatively weak”, and that consumer prices would be flat for now, the BoJ refrained from adding immediate stimulus.

The plan surprised markets, which had expected an incremental raise in its ¥101 trillion (R10 trillion) asset buying and lending programme, but the delay before the easing measures kick in dulled the impact and saw the yen edge higher against the dollar.

European shares, which have been testing two-year highs in recent days, experienced a turbulent morning as markets latched on to a report that German regulators were simulating a separation of some banks’ operations, and on rumours – later denied – that Deutsche Bank was preparing a profit warning.

Frankfurt’s DAX fell as much as 1.4 percent but had clawed back half of the losses by midday in Germany. London’s FTSE 100, Paris’s CAC-40 and Madrid’s Ibex were between flat and down 0.3 percent, leaving the FTSEurofirst 300 down 0.2 percent on the day.

A better-than-expected reading from the German ZEW investor sentiment index helped the recovery. It rose sharply for a second consecutive month in January in a sign that the euro zone crisis is no longer hitting Europe’s largest economy as hard as in late 2012.

“A slight improvement was expected, but the actual recovery was significantly better,” said Stefan Kipar, an economist at BayernLB. “All in all, the indicators are showing that financial analysts increasingly expect a recovery of the German economy in the spring.”

Equity markets, particularly in Japan, had risen strongly in the run-up to yesterday’s Bank of Japan meeting, and the confirmation of the central bank’s plans was enough to lift the MSCI world index 0.15 percent to a fresh 20-month high of 352.54 points.

Brent crude rose 0.3 percent to $112.07 (R994.20) a barrel, and gold was up 0.2 percent as the BoJ’s easing action added to recent positive data from the US and China, while growing confidence in the strength of China’s economic recovery pushed copper up 0.7 percent to $8 120 a ton.

General market sentiment was also supported by signs of a compromise to avert a US fiscal crisis. Republican leaders in the US House of Representatives have scheduled a vote for today on a nearly four-month extension of US borrowing capacity, aimed at avoiding a fight over the looming need to raise the federal debt ceiling.

Bond market investors were also eyeing a new 10-year Spanish bond sale, its first since November 2011, as the latest evidence of its rising confidence following the European Central Bank’s promise to buy its bonds if necessary.

Last week Italy sold E6 billion of its first 15-year bond in more than two years. “Anything below E4bn would most likely be seen as a disappointment after the Italian deal,” Michael Leister at Commerzbank said of Spain’s sale.

The upbeat German ZEW release, which put German investor and analyst morale at a two-and-a-half-year high, prompted a fall in German government bonds and lifted the euro. The yen strengthened across the board on disappointment that there will be no immediate BoJ easing. – Reuters