Japan’s central bank and its $1.1 trillion pension fund landed a pair of blows for Abenomics today, with policy changes pushing Tokyo stocks to the biggest gain in a year and igniting a worldwide rally.

The Government Pension Investment Fund will put half its holdings in local and foreign stocks, more than double its previous target, officials said today. Just hours earlier, the Bank of Japan unexpectedly added to what was already unprecedented monetary easing. The Topix index soared 4.3 percent, while Standard & Poor’s 500 Index futures rallied 1.2 percent as of 10:23 a.m. in London and the yen slumped to the weakest since January 2008 against the dollar.

The overseers of Japan’s pension savings and central bank emerged again as allies to both global equity investors and Prime Minister Shinzo Abe as he seeks to spur an economic revival that would boost stocks and weaken the currency. The Topix slid 1.8 percent this year through yesterday, before erasing that loss today, as investors weighed the progress of Abe’s growth policies after the economy was dented by a sales-tax increase. The equity gauge jumped 51 percent in 2013.

“Investors, especially ones outside Japan, are using stocks as a measure to gauge the seriousness of Abenomics,” said Koichi Kurose, Tokyo-based chief market strategist at Resona Bank Ltd., before today’s announcement. “The understanding is that stocks rising equals legitimate growth strategies.”

The pension fund set allocation targets of 25 percent each for Japanese and overseas equities, up from 12 percent each, it said at a briefing today in Tokyo. GPIF will reduce domestic bonds to 35 percent of assets from 60 percent. The new figures don’t include an allocation to short-term assets, while the previous targets did. Analysts surveyed by Bloomberg this month had anticipated levels of 24 percent for local stocks, 15 percent for global shares and 40 percent for Japanese bonds, taking short-term holdings into account.

David Fuller's view

Borrowing from the Fed’s success in boosting Wall Street and improving sentiment, Japan’s Government Pension Investment Fund will put many more $billions into not only its own stock market but also global equities.  Before that happens, this announcement has already squeezed short sellers, while encouraging both Japanese and international investors to increase their holdings of equities.  The bottom line: monetary policy remains exceptionally accommodative.