The yen weakened and Japanese government bond yields fell after the Bank of Japan on Tuesday announced an exit from years of ultra-easy monetary policies, marking a historic shift from a decades-long fight against deflation.
The Nikkei share average rose, reversing morning losses, following volatile trading immediately after the central bank said it was ending its negative interest rates policy and yield curve control (YCC), as well as dropping purchases of risky assets, including exchange-traded funds (ETFs).
The decision was widely expected after local and international media, including Reuters, had reported over the past week of a likely end to most or all of the BOJ's stimulus programmes at this policy meeting.
That resulted in 'sell-the-fact' trade in Japanese markets, analysts said.
The yen, in particular, appeared to have fallen victim, with domestic rates still also extremely low compared with the United States. The dollar jumped 0.76% to 150.285 yen as of 0748 GMT.
The 10-year JGB yield lost 3 basis points to 0.725%.
One-month overnight index swaps surged to the highest since 2016, when YCC and negative rates were put in place.
Some dovish undertones in the BOJ's policy decision will keep bond yields under pressure, said Shoki Omori, chief Japan desk strategist at Mizuho Securities.
"Bond purchase amounts basically stay the same, which means the BOJ isn't taking a hawkish stance," cheering investors such as life insurers who need to buy bonds into Japan's fiscal year-end this month, he said.
Omori also expects the yen to continue to fall.
"The yen remains a funding currency and is likely to keep being utilized for carry trades," he said.
Tuesday's policy shift ushered in the first rate hike in Japan since 2007, but it still keeps rates stuck around zero.
Addressing a press conference, BOJ Governor Haruhiko Ueda said that while the achievement of the central bank's 2% inflation target had come into sight, risks remained about wages and consumption.
In its policy statement, the BOJ said it will continue its JGB purchases at broadly the same amount as before, although it will scale back the maximum limit of its purchases.
The BOJ's move to end its radical stimulus policies was in part helped by the biggest wage hikes in 33 years at annual negotiations with unions. Finance Minister Shunichi Suzuki said on Friday that Japan had emerged from decades of deflation.
A positive cycle of price hikes and wage increases, as well as solid earnings, helped drive a 19% surge in the Nikkei this year, far outpacing a 6.6% rise for the MSCI World Index (.MIWO00000PUS).
"For the time being, I expect equity prices to increase, with the uncertainty gone surrounding the meeting," said Norihiro Yamaguchi, senior economist at Oxford Economics in Tokyo.
"For a sustained rally, a rise in U.S. equities is also necessary."
