The Bank of Japan left interest rates unchanged as expected on Friday amid increased uncertainty over the country’s political future and the effects of U.S. trade tariffs on the economy.
The BOJ also outlined plans to begin selling some of its massive holdings of stocks, exchange-traded funds, and real estate investment trusts, after it flagged plans to halt their purchases in a historic move last year. Japanese stock markets tumbled on this announcement, given that it represents more monetary tightening.
The BOJ left its benchmark rate at 0.5%, in line with market forecasts. The central bank had last hiked rates in January this year.
Friday’s decision was backed by a 7-2 majority vote in the BOJ’s rate-setting board, with two members-- Takata Hajime and Tamura Naoki calling for a 25 basis point hike amid steady inflation.
BOJ to begin selling ETFs, REIT holdings
The BOJ said it will begin selling its ETF holdings at a pace of about 330 billion yen ($2.24 billion) per year, while REITs will be sold at a pace of about 5 billion yen per year.
The central bank said it will sell each of the assets at an amount proportionate to the share of of each asset in its holdings, and will also spread out the timing of the sales.
"The disposal will begin once necessary operational preparations are completed," the BOJ said, adding that it may alter its pace of asset sales in future meetings.
Morgan Stanley in a Thursday note estimated the total market value of the BOJ’s ETF holdings at 79.5 trillion yen ($533.67 billion), with unrealized gains of 43.8 trillion yen. This represents over 7% of the Tokyo Stock Exchange’s market capitalization.
MS said the top 30 stocks with the highest BOJ ETF ownership ratios were in the tech and chipmaking sectors. Companies such as Advantest Corp. (TYO:6857), TDK Corp (TYO:6762), Nitto Denko Co (TYO:6988), and Tokyo Electron Ltd. (TYO:8035) have among the biggest concentrations of ETF exposure, MS said.
But MS added that despite concerns over increased selling pressure on said stocks, they had remained largely resilient in recent weeks.
Japan stocks slide, yen firms as ETF sales ring hawkish
The BOJ’s plans to begin trimming its balance sheet represent some monetary tightening by the central bank, after it began unwinding nearly a decade of ultra-loose policy in early-2024. The BOJ had then flagged plans to begin selling its massive holdings.
Japanese stock markets tumbled on this notion, with the ETF sales also expected to add selling pressure to major tech and retail names on the Nikkei.
The Nikkei 225 index reversed early gains and slid 1.4% from record highs after the BOJ’s decision, while the TOPIX shed 0.5%.
The Japanese yen was cheered by the hawkish messaging, with the USD/JPY pair-- which gauges the amount of yen required to buy one dollar-- falling 0.5%.
BOJ grapples with economic, political uncertainty
The BOJ was widely expected to keep rates steady in the face of increased political uncertainty, following Prime Minister Shigeru Ishiba’s abrupt resignation earlier in September.
Ishiba’s exit leaves a political vacuum in Japan’s ruling Liberal Democratic Party after it lost its parliamentary majority earlier this year. A leadership struggle in the LDP, coupled with the need for more collaboration with regional parties to push future legislation, presents an uncertain outlook for fiscal policy in the country.
Ishiba’s potential replacement is also expected to be far more fiscally dovish, which could also herald more political opposition for the BOJ to raise rates.
The BOJ flagged continued caution over the Japanese economy in its monetary policy statement on Friday, citing headwinds from trade tariffs and slowing local investment.
The central bank warned that local economic growth is "likely to moderate" in the near-term, but "accommodative financial conditions are expected to provide support."
The central bank also sees consumer price index inflation moderating in the coming months, although underlying CPI is expected to gradually increase.
Friday’s decision came just hours after CPI data showed Japanese inflation cooling as expected in August. But underlying CPI inflation read at 3.3%, remaining well above the BOJ’s 2% annual target.
BOJ Governor Kazuo Ueda has repeatedly warned that the central bank will raise interest rates to curb high inflation. The governor is now set to speak at a post-meeting conference later in the day, which will be closely watched for more cues on policy.
Source :
https://www.investing.com/news/economy-news/bank-of-japan-keeps-interest-rates-unchanged-outlines-etf-sale-plans-4246037
