BOJ’s “unexpected hawkish turn”: two “dissenting votes” and ETF reduction
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Two committee members opposed, surprise announcement of ETF sell-off, and Kazuo Ueda turning “hawkish” — the Bank of Japan may raise interest rates sooner than expected.
On Friday, the Bank of Japan sent a more hawkish signal than the market expected at its policy meeting, with two members voting against keeping the current interest rate unchanged, while the central bank decided to start selling its ETF and REIT holdings. This series of actions suggests that the BOJ may exit its easy monetary policy faster than previously thought.
Although the BOJ kept its short-term interest rate at 0.5%, members Hajime Takata and Naoki Tamura proposed raising the rate to 0.75%. While the proposal was not passed, the market regards this as a prelude to an imminent rate hike. The unexpectedly hawkish stance strengthened the yen and pulled Japanese stocks back from their highs.
The BOJ also announced it will sell ETFs at a pace of about 330 billion yen ($2 billion) per year and REITs at a pace of about 5 billion yen per year. This decision marks continued progress toward monetary policy normalization, though at this rate, it would take more than a century to fully unwind its holdings.
Additionally, BOJ Governor Kazuo Ueda said after the meeting that if economic and price forecasts are realized, the BOJ will continue to raise rates according to economic and price improvements. The market’s focus has shifted back to the timing of the BOJ's next rate hike, despite global uncertainties and political instability in Japan.
Rising Hawkish Pressure Within the Committee
The two dissenting votes highlight the growing hawkish pressure within the BOJ. Saxo Chief Investment Strategist Charu Chanana commented:
The dissent by Takata and Tamura underscores the increasing hawkish pressure within the BOJ. While a majority of committee members still favor a steady path, the two opposing votes suggest the debate is tilting toward a faster normalization.
The BOJ maintained its judgment that the economy will continue its moderate recovery after the two-day meeting, but warned that U.S. tariffs are weighing on manufacturers’ profits. Kazuo Ueda emphasized that real interest rates remain very low.
This hawkish turn is in sharp contrast to the Federal Reserve’s rate cut on Wednesday and its signal of further cuts. Media surveys show that most economists expect the BOJ to hike rates by another 25 basis points by the end of the year, but opinions are divided on the timing, with bets focused on October and next January.
ETF Reduction Plan Officially Launched
The BOJ decided to sell its ETF and REIT holdings, marking another step in monetary policy normalization. The central bank accumulated 37 trillion yen worth of ETFs in its 13-year buying program starting in 2010, aimed at reviving the sluggish economy.
While the market generally expected the BOJ to eventually reduce ETF holdings, the timing of the announcement came much sooner than predicted. The central bank said it would begin sales once needed preparations are complete, possibly early next year, and may review the pace at future policy meetings.
The slow pace of sales highlights the BOJ’s caution to avoid excessive market disruption. The decision to reduce ETFs pushed the benchmark Nikkei index down from its record high, while the hawkish dissent sent the yen and short-term bond yields soaring.
Political Uncertainty Introduces New Variables
While some analysts believe the hawkish dissent has increased the likelihood of a rate hike in October, others think that the political uncertainty caused by Prime Minister Shigeru Ishiba’s decision to resign casts a shadow over such moves.
The ruling party is preparing for a leadership election on October 4 to choose Ishiba’s successor. Leading candidates include veteran lawmaker Sanae Takaichi, who is a staunch opponent of BOJ rate hikes.
Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research & Consulting, said that as the U.S. outlook weakens and the Fed continues to cut rates, it may become more difficult for the BOJ to hike rates in the opposite direction. The monetary policy stance of Japan’s next prime minister after the ruling party’s leadership election will also be closely watched.
Last year, the BOJ exited its massive decade-long stimulus program and raised short-term rates to 0.5% in January, judging that Japan is on the verge of sustainably achieving its 2% inflation target. Data released Friday showed Japan's core consumer prices rose 2.7% year-on-year in August, the third consecutive month of slowing but still above the BOJ’s 2% target.
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