BOJ to unwind ETF holdings as board dissent signals hawkish shift

By Leika Kihara

TOKYO, Sept 19 (Reuters) - The Bank of Japan decided on Friday to start selling its holdings of risky assets and two board members voted against keeping interest rates steady, suggesting the bank would phase out its massive monetary stimulus sooner than first thought.

While the central bank kept short-term interest rates at 0.5%, board members Hajime Takata and Naoki Tamura proposed, unsuccessfully, a hike to 0.75% in a move markets saw as a prelude to a near-term increase in borrowing costs.

"The dissent from Takata and Tamura highlights growing hawkish pressure inside the BOJ," said Charu Chanana, Chief Investment Strategist at Saxo.

"While the majority still favour a steady path, the presence of two board members voting against today's decision suggests the debate is tilting toward quicker normalisation."

At the two-day meeting that ended on Friday, the BOJ decided to sell its holdings of exchange-traded funds (ETF) in the market at an annual pace of around 330 billion yen.

It also decided to sell real-estate investment trusts (REIT) at an annual pace of around 5 billion yen.

The BOJ said it would start selling once necessary operational preparations are completed, and could review the pace of selling in future policy meetings.

While the BOJ was widely expected to unwind its ETF holdings eventually, the announcement came much sooner than the market was predicting.

The decision to unload ETFs pushed down the benchmark Nikkei index .N225 from its record high, while the yen and short-term bond yields surged on the hawkish board dissent.

The BOJ's hawkish tilt contrasted with the U.S. Federal Reserve's decision on Wednesday to cut interest rates and signal more reductions to halt any slide in an already weakening labour market.

POLITICAL HEADWINDS?

While some analysts see the hawkish dissent as heightening the chance of a rate hike in October, others see political uncertainty caused by Prime Minister Shigeru Ishiba's decision to step down casting doubt over such a move.

The ruling party is gearing up for a leadership race on October 4 to choose Ishiba's successor. Among frontrunners is veteran lawmaker Sanae Takaichi, a vocal opponent of BOJ rate hikes.

"With the prospect of a slowdown in the U.S. economy and further rate cuts (by the Fed) on their way, it may become increasingly difficult for the BOJ to move in the opposite direction and raise interest rates," said Shinichiro Kobayashi, principal economist at Mitsubishi UFJ Research and Consulting.

"The stance of Japan's next prime minister on monetary policy following the ruling party's leadership race will also be closely watched."

The BOJ exited a massive, decade-long stimulus programme last year and raised short-term rates to 0.5% in January on the view Japan was on the cusp of sustainably achieving its 2% inflation target.

While Governor Kazuo Ueda has stressed the bank's resolve to keep hiking rates, he has vowed to tread cautiously on uncertainty over the impact of U.S. tariffs on Japan's economy.

A Reuters poll showed a majority of economists expect another 25-basis-point hike by year-end. But those surveyed are split on the timing with bets centering on October and January.

Japan's core consumer prices rose 2.7% in the year to August, data showed on Friday, slowing for the third straight month but staying above the central bank's 2% target.