The Bank of Japan kept its policy rate intact at the 0.5% level at its September meeting, in line with broader market expectations, but surprised the markets by announcing that it will begin unwinding its ETF and REIT holdings portfolio, in a step to further normalize its monetary policy practices.

Albeit keeping rates at their highest level since 2008, emphasizing a flexible, data-driven approach to monetary policy, board members noted that are prepared to raise rates if economic performance and inflation meet the central bank’s forecasts.

BoJ noted that the economy is recovering moderately but highlighted the possibility of bouts of weakness, pointing out global trade policies and a tumultuous political landscape.

Worth noting was also the fact that 2 out of the 9 board members dissented and voted against holding rates steady, favouring instead of going forward with a hike, fuelling speculations that a rate increases may very well be on the table in upcoming decisions.

The bank in a sense will start selling well over ¥75bn worth of stockpiled exchange traded funds (ETF) over the course of the decades. Governor Ueda noted the extreme gradualness of BoJ’s unwinding plans at the press conference stating “we won’t be here in 100 years’ time, but our intention is to keep selling for more than 100 years”. As for the Real Estate Investment Trust (J-REITs) holdings, the sales target rate will be roughly ¥5 bn per annum.

Money markets assessed the plans and commentary from BoJ policymakers and upwardly revised the odds for a 25bps rate hike at the December meeting, tilting the scale in favour of tighter policy conditions to account for the offloading news.

The Japanese Yen slipped at the time of the decision, as fears for a return to currency weakness were broadcasted across the FX market and Japanese equities quickly dipped their toes in the reds.

Technical Analysis

NIKKEI225 Chart – Nikkei, Japan’s equity index falls swiftly after BoJ’s ETF sale announcement

Resistance: 46000 (R1), 47000 (R2), 48000 (R3)
Support: 43900(S1), 42900 (S2), 41900 (S3)