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Japan's central bank keeps policy steady, but in split

vote

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BOJ announces start of ETF, J-REIT sales

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Nikkei falls from record high; JGB yields hit 17-year

peaks

(Updates prices towards the close of stock trading)

By Kevin Buckland and Rocky Swift

TOKYO, Sept 19 (Reuters) - Japan's Nikkei share average

turned negative on Friday, while the yen firmed, after the Bank

of Japan (BOJ) kept interest rates steady as expected, but in a

split decision, with two of the nine board members voting in

favour of a hike.

The central bank also announced it will begin selling its

holdings of exchange-traded funds (ETFs) and Japanese

real-estate investment trusts (J-REITS), amassed over a decade

of massive stimulus.

Japanese government bond yields jumped to 17-year peaks.

"It came as a surprise," Hirofumi Suzuki, chief currency

strategist at SMBC, said about the BOJ's decision.

"With the start of ETF sales and two dissenting votes

against leaving policy unchanged, i.e., in favour of tightening,

the outcome was hawkish despite expectations for a

straightforward hold."

Investor focus now shifts to BOJ Governor Kazuo Ueda's news

conference at 0630 GMT.

The Nikkei tumbled as much as 1.8% in the immediate

aftermath of the policy announcement, and was down 0.5% at

45,099.98, as of 0508 GMT, about 80 minutes after the central

bank's announcement.

In early trading, the index had risen as much as 1.2% to a

record high of 45,852.75, driven by a surge in chip-sector

stocks following an overnight rally in U.S. peers.

"The timing of the ETF sale came as something of a surprise,

occurring just as Japanese equity markets were hitting fresh

highs and investor caution was rising," said Shinichiro

Kobayashi, principal economist at Mitsubishi UFJ Research and

Consulting.

"While it is a negative factor (for stock prices),

unwinding ETF holdings is the right step, as a central bank

taking on private-sector credit risk is itself an unusual

situation."

The yen strengthened as much as 0.5% to 147.20 per dollar

, reversing about half of the 1% decline in the

previous two sessions and eroding some of the support for

Japan's exporter-heavy stock market.

Traders now lay 60% odds on a quarter-point rate hike

over the two remaining BOJ meetings this year, up from about 50%

odds a week ago, according to LSEG data.

The two-year JGB yield, which is extremely

sensitive to monetary policy expectations, jumped 2.5 basis

points (bps) to 0.905%, the highest since June 2008.

The five-year yield leapt 4.5 bps to 1.2%,

a level not seen since October 2008.

The 10-year yield added four bps to 1.635%,

just short of this month's peak of 1.64%, which was the highest

since July 2008.

The 20-year yield, though, nudged down 0.5 bp

to 2.62%. Benchmark 30-year JGBs had yet to trade

following the BOJ's announcement.

"Initial market reactions suggest that short- and

medium-term yields may now be more susceptible to upward

pressure, as investors translate the reduction of risk-asset

purchases into heightened expectations of future rate

increases," said Shoki Omori, chief desk strategist at Mizuho

Securities.

"By contrast, yields at the long and super-long end of

the curve should remain more insulated, their behaviour being

driven primarily by changes in the term premium."