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Japanese stocks sold off and the yen strengthened after the Bank of Japan unveiled long-awaited plans to start selling $250bn of exchange traded funds and revealed a divide over its decision not to raise interest rates.
The BoJ’s decision came against a backdrop of deep political uncertainty in Japan, as the ruling Liberal Democratic party prepares for an emergency leadership vote that will determine the country’s next prime minister.
In a move that came far sooner than markets had expected, the Japanese central bank said it would begin selling its $250bn worth of ETFs — a stash accumulated over 13 years from 2010, that expanded significantly during the “Abenomics” era of efforts to combat deflation.
The central bank also decided to hold rates at 0.5 per cent. While the decision was in line with market expectations, it was decided by a 7-2 vote and followed a data release earlier on Friday that showed Japan’s core consumer price inflation rose 2.7 per cent in the 12 months to August.
Following the BoJ announcement the Nikkei 225 stock average slid and was down 1.6 per cent on the day. It had earlier risen 1.2 per cent in morning trading to hit an all-time high.
The yen strengthened 0.4 per cent against the dollar following the BoJ decision.
Under the BoJ’s ETF sales plan, which it said could be adjusted at future policy meetings, the central bank will annually sell ETFs with a book value of ¥330bn ($2.2bn) and a current market value of ¥620bn ($4.2bn). At that pace, traders in Tokyo noted, the sell-off would take decades to complete.
At one point, according to analysts, the BoJ held roughly 7 per cent of the total market value of listed Japanese stocks.
Traders said the two dissenting voices on the interest rate vote were a major surprise, and pointed to the growing pressure within the BoJ to raise rates this year. It is extremely rare for members of the policy committee to vote against keeping rates on hold, especially when those dissenters are calling for rates to be raised.
“What these two dissenting votes mean is that at the next meetings, the market knows there are going to be at least two people on the committee voting for a hike,” said Benjamin Shatil, senior Japan economist at JPMorgan. “It is a clear indication of the direction of travel.”
Others said the market would now more confidently start pricing-in a 0.25 percentage point rise before the January meeting.
Shoki Omori, a senior rates strategist at Mizuho, said: “The split is obviously going to create a high expectation for the next meeting, after those expectations faded recently because of the LDP leadership election. The market will now price in a much higher chance of a rate hike in October.”
Other analysts, however, pointed to the official statement accompanying the BoJ rate announcement, which said that “it remains highly uncertain how trade and other policies in each jurisdiction will evolve, and how overseas economic activity and prices will react to them” — a comment widely seen as a reference to US tariff policies.
That suggests, said Morgan Stanley MUFG economist Takeshi Yamaguchi, that the BoJ governor Kazuo Ueda remains cautious, adding that he thought the hurdles to a rate increase in October remained high.
Rising living costs, and the failure of many companies to increase wages above inflation, have become an explosive issue in Japanese politics and contributed to the LDP’s recent loss of its majority in both houses of parliament.
Core CPI, which excludes fresh food costs, has exceeded the BoJ’s 2 per cent target for three years.
Additional reporting by William Sandlund in Hong Kong
