TOKYO: The Bank of Japan decided on Friday (Sep 19) to start selling its holdings of risky assets and two board members voted against keeping interest rates steady, suggesting the bank would phase out its massive monetary stimulus sooner than first thought.

While the central bank kept short-term interest rates at 0.5 per cent, board members Hajime Takata and Naoki Tamura proposed, unsuccessfully, a hike to 0.75 per cent in a move markets saw as a prelude to a near-term increase in borrowing costs.

"The dissent from Takata and Tamura highlights growing hawkish pressure inside the BOJ," said Charu Chanana, Chief Investment Strategist at Saxo.

"While the majority still favour a steady path, the presence of two board members voting against today's decision suggests the debate is tilting toward quicker normalisation."

The hawkish shift surprised markets and put investor focus back on how soon BOJ will next raise interest rates, even as uncertainty over the global outlook and domestic politics grows.

"Real interest rates remain very low," BOJ Governor Kazuo Ueda said in a press briefing after the decision. "If our economic and price forecasts materialise, we will continue to raise interest rates in accordance to improvements in the economy and prices."

At the two-day meeting that ended on Friday, the BOJ decided to sell its holdings of exchange-traded funds (ETF) in the market at an annual pace of around ¥330 billion (US$2 billion).

It also decided to sell real-estate investment trusts (REIT) at an annual pace of around ¥5 billion.

The BOJ said it would start selling once necessary operational preparations are completed, and could review the pace of selling in future policy meetings.

The decision marks another step in the BOJ's efforts to normalise monetary policy, having accumulated ¥37-trillion worth of ETFs during 13-years purchases that began in 2010 and were designed to revive a moribund economy.

But the slow pace of selling, which will likely start early next year, means it would take more than a century to unload all of its holdings, underscoring the BOJ's focus on avoiding any undue market disruptions.

While the BOJ was widely expected to unwind its ETF holdings eventually, the announcement came much sooner than the market was predicting.

The decision to unload ETFs pushed down the benchmark Nikkei index from its record high, while the yen and short-term bond yields surged on the hawkish board dissent.

The BOJ's hawkish tilt contrasted with the US Federal Reserve's decision on Wednesday to cut interest rates and signal more reductions to halt any slide in an already weakening labour market.

The BOJ maintained its view the economy would continue to recover moderately, but warned that US tariffs were weighing on manufacturers' profits.

While some analysts see the hawkish dissent as heightening the chance of a rate hike in October, others see political uncertainty caused by Prime Minister Shigeru Ishiba's decision to step down casting doubt over such a move.

The ruling party is gearing up for a leadership race on Oct 4 to choose Ishiba's successor. Among frontrunners is veteran lawmaker Sanae Takaichi, a vocal opponent of BOJ rate hikes.

"With the prospect of a slowdown in the US economy and further rate cuts (by the Fed) on their way, it may become increasingly difficult for the BOJ to move in the opposite direction and raise interest rates," said Shinichiro Kobayashi, principal economist at Mitsubishi UFJ Research and Consulting.

"The stance of Japan's next prime minister on monetary policy following the ruling party's leadership race will also be closely watched."

The BOJ exited a massive, decade-long stimulus programme last year and raised short-term rates to 0.5 per cent in January on the view Japan was on the cusp of sustainably achieving its 2 per cent inflation target.

While Ueda has stressed the bank's resolve to keep hiking rates, he has vowed to tread cautiously on uncertainty over the impact of US tariffs on Japan's economy.

A Reuters poll showed a majority of economists expect another 25-basis-point hike by year-end. But those surveyed are split on the timing with bets centering on October and January.

Japan's core consumer prices rose 2.7 per cent in the year to August, data showed on Friday, slowing for the third straight month but staying above the central bank's 2 per cent target.

BOJ to unwind ETF holdings as board dissent signals hawkish shift