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BOJ surprises with fresh stimulus, Nikkei surges 5%

Koichi Kamoshida - Getty Images

The Bank of Japan (BOJ) on Friday surprised markets with fresh monetary stimulus to support an economy that's struggled with a nation-wide sales tax hike, sparking a rally in Japanese stocks and the dollar-yen.

The central bank said it will expand annual bond purchases to 80 trillion yen ($726 billion) per year. Previously, the BOJ targeted an annual increase of 60-70 trillion yen.

The BOJ will also increase its purchases of government debt by about 30 trillion yen, extend the average duration of JGB holdings to around 10 years and triple its purchases of exchange-traded funds and Japan real estate investment trusts.

Read More Japan inflation slows in September, increasing pressure on BOJ

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In a statement, the BOJ signaled its dovish stance on monetary policy, saying it will pursue current easing measures "in a open-ended manner."

The decision was not an easy one, with the BOJ board voting 5-4 in favor of fresh stimulus.

Ed Rogers, CEO & CIO at Rogers Investment Advisors, said BOJ governor Haruhiko Kuroda "has proven once again that it well within his powers and the total commitment that Japan has to help create the environment needed for 2 percent inflation. The message could not be clearer."

Read More Is South Korea headed for Japan-style deflation?

The decision comes as fresh data showed consumer inflation slowing further in September, raising skepticism over the BOJ's ability to achieve it's 2 percent inflation target.

Adjusted for an increase in the sales tax hike in April, core consumer prices rose 1 percent on year, slower than the 1.1 percent rise in August and well below the 2 percent target the Bank of Japan (BOJ) aims to achieve by April 2015.

Analysts say the BOJ needed to do more to prepare the economy for a second hike in sales tax, to 10 percent, scheduled for next year. The sales tax hike to 8 percent from 5 percent in April hasdragged on the economy, causing growth to contract an annualized 7.1 percent in the second quarter.

Read More Wal-Mart to close 30 underperforming stores in Japan

"They need to get the animal spirit up because 'Abenomics part one' needs to be successful and he has stumbled a bit post the tax hike. I guess that's what is happening," Chong said.

The impact on markets was swift: the dollar rose to near 7-year highs against the yen at 110.67, while the Nikkei surged 5 percent.

"The most important message for equity investors is: don't fight QE. This is where Japan is going and this is why Japanese equities need to be part of your portfolio," said Rogers.



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