Bank Of Japan Holds Rate Steady; Plans To Lower ETF Holdings

(RTTNews) - The Japanese central bank left its key interest rate unchanged on Friday, as expected, but surprised markets with a decision to reduce the holdings of its massive stock of exchange-traded funds, suggesting that the monetary policy normalization is underway.

The Bank of Japan policy board, led by Governor Kazuo Ueda, voted 7-2 to hold the uncollateralized overnight call rate at around 0.5 percent.

Previously, the bank had raised the benchmark rate to the current level from 0.25 percent in January.

Also, the BoJ board unanimously decided to dispose its holdings of exchange-traded funds and Japan real estate investment trusts, without having destabilizing effects on the financial markets.

Policymakers Takata Hajime and Tamura Naoki were the dissenting members, and they proposed to raise the interest rate by 25 basis points to around 0.75 percent.

Hajime assessed that there had been a shift away from the deflationary norm and the price stability target had been more or less achieved. Naoki said the BoJ should set the policy rate a little closer to the neutral rate with risks to prices becoming more skewed to the upside.

ING economists expect the BoJ to deliver a 25-basis points hike in October. Nonetheless, they said political factors may influence future policy decision.

Economists said the unwinding of holdings of ETFs and J-REITs will be at a measured and gradual pace.

Further, BoJ policymakers expect economic growth to moderate, as trade and other policies lead to a slowdown in overseas economies and to a fall in domestic corporate profits.

Thereafter, Japan's economic growth is likely to rise, with overseas economies returning to a moderate growth path, the bank said.