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Economy Japan’s surprise stimulus roils markets, caps wild October

A man stands watching an electronic stock board of a securities firm in Tokyo, Friday, Oct. 31, 2014.

Eugene Hoshiko/AP

The Bank of Japan sent shock waves through financial markets by announcing it will increase its bond-buying economic stimulus program, the biggest development on a day that put an exclamation point on a volatile month for global markets.

The central bank's surprise move was in stark contrast to this week's decision by the U.S. Federal Reserve to end its own bond-buying program (known as QE3) in light of the strengthening U.S. economy. Japan's move sent investors flocking to the U.S. dollar, causing ripples through other financial markets. Stocks rallied, with the Dow Jones industrial average and S&P 500 indexes reaching record highs. But commodity prices tumbled, with gold falling to a four-year low and oil dipping back toward $80 (U.S.) a barrel. Other currencies slumped, including the yen, the euro and the Canadian dollar.

The loonie fell two-thirds of a cent against its U.S. counterpart, caught not only in the global currency and commodity storm but also by worrisome economic news at home. Canada's gross domestic product fell 0.1 per cent in August from July, its first monthly decline since the end of 2013.

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The Bank of Japan's decision is the latest evidence of the increasingly wobbly and uneven global economic recovery that, along with geopolitical uncertainty and the Ebola scare, roiled markets in October. It came the same day Russia surprised markets with a huge 1.5-percentage-point increase in its interest rate (to 9.5 per cent), while the euro zone reported a still-dismal unemployment rate of 11.5 per cent and a dangerously low inflation rate of 0.4 per cent. But it also came just a day after the United States reported a third-quarter GDP growth estimate of a stronger-than-expected 3.5 per cent.

Canadian economists cut their own third-quarter growth estimates to 2 per cent after the disappointing August GDP report. But they remain hopeful that Canada, with its close trade ties to the United States, can count on the rising U.S. tide to lift its economic boat – even as much of the rest of the world founders.

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