NEW YORK (Reuters) - 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. Volatile markets and slowing global growth have threatened the central bank's efforts to overcome deflation.
Equities surged globally, the yen tumbled and sovereign debt rallied after the BOJ said it would charge 0.1 percent for excess reserves, an aggressive policy pioneered by the European Central Bank. The BOJ said it may cut rates further if necessary.
A sharp braking of U.S. economic growth in the fourth quarter also raised expectations that the Fed will not be able to hike rates four times this year as it has indicated.
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 JP10YTN=JBTC plunged to a record low of 0.09 percent, and the yen JPY= fell 1.90 percent against the U.S. dollar to 121.07 yen, its biggest daily decline in more than a year.
The Nikkei share index .N225 whipsawed, but closed 2.8 percent higher. Shares on Wall Street and in Europe rose more than 2 percent, while MSCI's all-country world stock index .MIWD00000PUS gained 2.06 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 .FTEU3 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.
U.S. stocks surged into the close. The CBOE Volatility index .VIX, often called Wall Street's fear index, fell 12 percent to close below 20 for the first time since Jan. 6.
The Dow Jones industrial average .DJI closed 396.66 points higher, or 2.47 percent, to 16,466.3. The S&P 500 .SPX gained 46.88 points, or 2.48 percent, to 1,940.24 and the Nasdaq Composite .IXIC rose 107.28 points, or 2.38 percent, to 4,613.95.
For the month, the Dow lost 5.5 percent, the S&P 500 fell 5.1 percent and the Nasdaq dropped 7.9 percent, capping its worst January in seven years. For the week, the Dow gained 2.3 percent, the S&P added 1.7 percent and the Nasdaq 0.5 percent.
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 DE10YT=TWEB fell 7 basis points to 0.26 percent, its lowest since last April. The 37-basis-point decline in January was its biggest monthly drop since May 2012.
Two-year German yields DE2YT=TWEB fell 4 basis points to a new record low at minus 0.487 percent. The BOJ move cemented expectations for further ECB stimulus.
Benchmark U.S. 10-year notes US10YT=RR were last up 17/32 in price, pushing their yield down to 1.9261 percent after sliding to 1.911 percent, the lowest since Oct. 2.
The euro EUR= fell to a session low against the dollar after the U.S. GDP report, dropping 0.96 percent to $1.0832.
The dollar index .DXY, tracking the dollar against a basket of major currencies, rose 1.05 percent to 99.549.
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 LCOc1 settled 85 cents higher at $34.74 a barrel, while U.S. futures CLc1 rose 40 cents to settle at $33.62.
Editing by Bernadette Baum and James Dalgleish