The Bank of Japan maintains interest rates as scheduled, but the rise in interest rate hikes is imminent! Heavyweight announcement of ETF selling plan.

Given the lingering uncertainty in the global economy and domestic politics in Japan, the Bank of Japan, while seeking clarity on the outlook, kept its benchmark interest rate unchanged and announced that it would begin selling Exchange-Traded Funds (ETF products). Furthermore, a key detail of this interest rate decision is that the Bank of Japan's announcement was significantly delayed compared to usual, due to internal divisions in the voting. The Bank of Japan maintained the interest rate at 0.5% with a vote of 7-2, with members Harada and Nakazato dissenting. Both members argued that the interest rate should be increased by 25 basis points to 0.75%, as the risks of inflation were tilting towards the upside, and the Bank should move the policy rate closer to neutral. According to its interest rate decision statement, the Bank of Japan, at the end of a two-day monetary policy meeting in Tokyo on Friday, kept the policy rate unchanged at 0.5%. All 50 economists surveyed by institutions expected the result of this interest rate decision to keep the benchmark interest rate unchanged. The interest rate vote was 7-2, the first time since Governor Haruhiko Kuroda took office that he faced two dissenters in keeping the interest rate unchanged, signaling the rise of the "restarting rate hike" faction in the Bank of Japan's Monetary Policy Committee. The Bank of Japan stated that it will begin selling its ETF holdings at a scale roughly equivalent to what it purchased from banks around the year 2000 and real estate investment trusts (J-REITs) in the Japanese market. After completing the necessary operational preparations, the Bank will begin disposing of the assets at an annual pace of approximately 620 billion yen (approximately $42 billion) based on market value. The yen strengthened before the announcement of the statement, and continued to rise afterwards. The yield on 10-year Japanese government bonds rose slightly. However, the yield on 5-year Japanese government bonds climbed to its highest level since 2008. The Japanese stock market entered a weak downward trajectory after news of the Bank of Japan's ETF sales, with the Nikkei 225 index continuing to fall, widening its decline to 1.8% to 44,496.74 points. This is the first time the Bank of Japan has mentioned its plan to sell its ETF holdings, valued at approximately 37 trillion yen (approximately $251 billion at book value), more than twice that at market value. The central bank became the largest single holder in the Japanese stock market during its large-scale negative interest rate monetary easing plan (which ended last year) through 2020. In July of this year, the Bank of Japan basically completed the sale of all stocks it bought from troubled banks during the financial crisis of the 2000s. Bank of Japan Governor Haruhiko Kuroda stated that the Bank of Japan can refer to this experience in considering how to dispose of ETFs. Earlier this month, Deputy Governor Masayoshi Amamiya also expressed a similar view. Data shows that since the Bank of Japan started selling bank stocks in October 2007, it took nearly 18 years to completely sell the bank stocks. Goldman Sachs economists pointed out in a report in July that it is reasonable to expect the central bank to gradually sell ETF assets starting in fiscal year 2026 to minimize potential losses and their impact on the Japanese stock market. In the midst of the intense competition for a successor following Prime Minister Yoshihide Suga's announcement of resignation, and about a year after the last leadership election, the decision of the Bank of Japan not to take any monetary policy action on Friday was widely expected in the interest rate futures market. From an economic perspective, members of the Bank of Japan's committee are still evaluating the impact of U.S. tariffs at home and abroad, according to media reports. Sign of the rise of the hawkish faction? Ben Bennett, Asian Investment Strategy Director at Lgim Investment Management, pointed out that although the Bank of Japan kept the interest rate unchanged, the announcement of the plan to sell ETF assets and the support of two hawkish members of the Monetary Policy Committee for a rate hike have raised concerns in the market about the Bank of Japan gradually shifting towards a hawkish stance; especially in the context of the Fed's rate cut earlier in the week, this move could lead to a sustained strengthening of the yen in the short term. Charu Chanana, Chief Investment Strategist at Shengbao Bank, said that the dissent of Harada and Nakazato highlights the increasing internal hawkish pressure at the Bank of Japan. Although most committee members still lean towards steady progress, the dissenting votes of these two members at today's decision indicate that policy discussions are leaning towards a faster normalization. "Their stance reflects a gradual shift in the dynamics of the committee, which may provide support for the yen, especially after the Fed's decision. The Bank of Japan's plan to reduce ETF/J-REIT holdings indicates a weakening of asset purchase support. This poses structural resistance to broad-based indices such as the Topix Index and the Nikkei 225 Index, but the specific impact will depend on the pace of sales and signals released. However, for the Japanese banking sector, as long as economic momentum remains stable, policy normalization through a steepening yield curve and improving net interest margins may actually become a tailwind," Chanana said after the Bank of Japan interest rate decision. When will the rate hike restart? Amid uncertainty in U.S. tariff policy and the political risks caused by Prime Minister Yoshihide Suga's announcement of resignation, the outlook for the Japanese economy is becoming complex. However, according to sources, some internal officials of the Bank of Japan believe that, despite the political instability, as the economic development meets expectations, it is still possible to raise the benchmark interest rate again by the end of this year. Taro Kimura, an economist at Bloomberg, said, "The Bank of Japan needs to reduce stimulus measures because real interest rates are severely negative, inflation rates are above target levels, and there is stable wage growth supporting this. However, the next action may have to wait until October. For now, the turbulent political situation will temporarily keep the Bank of Japan on hold." A recent report from Japanese financial giant Nomura stated that there will be significant uncertainty in the expectations of all financial institutions until the new government takes office and formally begins policy-making. If the Bank of Japan decides that the huge uncertainty brought by this new ruling coalition needs to be taken into account in its monetary policy modeling, the likelihood of the Bank of Japan restarting rate hikes in October will decrease, with Nomura's baseline scenario being the next rate hike in January 2026. According to the latest policy statement released by the Bank of Japan on Friday, it reiterated the Bank of Japan's forecast that the inflation rate may align with its target in the latter half of its three-year forecast period, indicating that the Bank is continuing to move towards another rate hike. Some observers of the Bank of Japan expect the Bank to raise borrowing costs again in the coming months, with the main focus now on when the Bank will make this decision. Internal sources at the Bank of Japan have indicated that a rate hike is possible this year regardless of domestic political uncertainty. A survey of institutions shows that over one-third of observers of the Bank of Japan expect a rise in borrowing costs in October, while 90% of those surveyed believe that the Bank of Japan will restart the rate hike process in January next year.