Yen gives up gains, bonds stay strong after BOJ stands pat as expected

By Kevin Buckland

TOKYO, Oct 30 (Reuters) - The yen gave up some of Friday's advances while Japanese government bonds (JGBs) held on to hefty gains after the Bank of Japan left the policy interest rate unchanged, as widely expected.

Japanese stocks were sharply lower, largely ignoring the central bank's decision, amid escalating worries about AI spending after cash burns at tech heavyweights such as Alphabet and Amazon.com.

The yen was largely flat at 157.64 to the dollar by 0411 GMT, after earlier strengthening as much as 0.4%. After the rate decision, the currency jerked slightly higher before gradually giving up ground.

The BOJ kept its policy rate at 1.25%, forgoing a back-to-back hike, while signalling vigilance against inflationary risks, suggesting scope to hike borrowing costs as soon as December.

"We saw the need to scrutinise a bit more economic and price risks, as well as financial conditions," Governor Kazuo Ueda said at a news conference.

"But underlying inflation has reached levels consistent with our price target. Financial conditions remain accommodative. There are various upside risks. We must therefore be vigilant to the risk of inflation overshooting our target."

The US Federal Reserve and the European Central Bank also held rates steady in decisions earlier this week.

"Taking its cue from the Fed and ECB, the BOJ has little reason to rush, particularly with US midterm elections potentially adding volatility across currencies and bonds," said Masahiko Loo, chief fixed income strategist at State Street Investment Management in Tokyo.

"Ueda can stay data-dependent, keep every meeting live and preserve the next hike for around the turn of the year."

The 10-year JGB yield was down 7 basis points at 2.22%. Bonds, whose prices move inversely to yields, have benefited from an investor flight to safer assets amid worries about the sustainability of the AI boom.

The benchmark Nikkei 225 .N225 closed down 2.1% at 63,290.11, but off an earlier slump of 3%, led lower by chip equipment heavyweights Advantest 6857.T and Tokyo Electron 8035.T, which dropped 5.9% and 5.2%, respectively.

In a surprise move, the BOJ also said it would speed the pace of its sales of exchange-traded funds from January to 860 billion yen ($5.45 billion) a year from 330 billion now, although the stock market was unmoved by the news.

"It's unhealthy for the central bank to hold such a big amount of stocks, but I'm not sure if the timing was good in this risk-off environment," said Tohru Sasaki, chief strategist at Fukoku Financial Group and a former BOJ official.

"I'm a bit worried about the reaction in the Japanese stock market going forward."

($1=157.8500 yen)