Analysis: Bank of Japan reducing ETF holdings could lead to a postponement of interest rate hikes, thus weakening the yen.

The rise of the yen may only be temporary, as the cautious stance of the Bank of Japan on normalizing monetary policy could lead to a delay in raising interest rates. The Bank of Japan announced plans to begin selling its holdings of ETFs, and revealed that two policy committee members voted against keeping rates unchanged, which investors interpreted as a shift from dovish to hawkish by the usually dovish central bank, leading to a strengthening of the yen exchange rate. However, selling ETFs will accelerate the quantitative tightening that has mainly relied on bonds. Although the Bank of Japan can adjust the pace of reducing holdings, the shrinking of the balance sheet still amounts to de facto tightening. Unless inflation accelerates, this tightening could delay rate hikes - a situation that in the end will not favor a stronger yen.