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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 throughout after BOJ governor's press conference)

By Kevin Buckland and Rocky Swift

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

flipped to a loss on Friday, while bond yields jumped to 17-year

peaks 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 for 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.

"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, ... the outcome was hawkish

despite expectations for a straightforward hold."

The Japanese yen initially strengthened following the

central bank's policy announcement, but had given up most of

those gains as BOJ Governor Kazuo Ueda struck a balanced tone at

his press conference, which started just as the stock market

closed.

The Nikkei ended the session down 0.6% at 45,045.81,

notably reclaiming the psychological 45,000 mark. It had tumbled

as much as 1.8% in the immediate aftermath of the policy

announcement.

In early trading, the Nikkei 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.

Speaking at his press conference, Ueda noted that it

would take the BOJ more than 100 years to dispose of its ETF and

REIT holdings at the pace decided on Friday. He was also

sanguine on the impact so far from tariffs on both the Japanese

and U.S. economies.

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

following the initial policy announcement, but pared

that to be almost flat at 147.92 by 0800 GMT.

Traders now lay 59% 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 4.5 bps to 1.64%,

matching the more than 17-year high from earlier this month.

However, the 20-year yield nudged up just 0.5

bp to 2.63%, and the 30-year yield sank as much

as 4.5 bps to a one-month low of 3.145%.

"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."

Japan's 30-year yield climbed to a record-high of 3.285%

earlier this month amid worries about the country's finances as

fiscally hawkish Prime Minister Shigeru Ishiba announced he

would step aside following an election drubbing by opposition

parties campaigning on consumption tax cuts.

Sanae Takaichi, among the frontrunners to replace Ishiba

and seen by markets as a fiscal dove,

said

at a press conference on Friday that she never denied the

need for restoring fiscal health, and that she would not

immediately pursue consumption tax cuts.