Yen sinks, sending Japan stocks surging as BOJ hike draws two dissents

By Kevin Buckland

TOKYO, Sept 18 (Reuters) - The yen dropped after the Bank of Japan raised interest rates in a well-telegraphed move, as dissent from two board members cast doubt on how aggressively it will tighten policy from here.

Japanese stocks rallied, helped by the weaker currency, which boosts the value of overseas earnings when repatriated into yen.

Japanese 2-year government bond yields , which are most sensitive to monetary policy expectations, sank 2.5 basis points to 1.835% as of 0442 GMT.

"The rate hike itself was in line with market expectations, but the two dissenting votes came as a modest surprise," said Hirofumi Suzuki, chief FX strategist at SMBC in Tokyo.

"The outcome has somewhat tempered expectations for further rate hikes and conveyed a dovish impression."

The yen extended early declines to be down about 0.7% at 157.085 per dollar, near session lows at 157.145, its weakest level since September 3.

Against that backdrop, the Nikkei surged 1.7% to 65,221.53, topping the psychological 65,000 mark for the first time in more than a week. The index had been up 0.8% at the midday break.

Tech shares led the rally, with chip-equipment makers Lasertec 6920.T and Advantest 6857.T jumping 9% and 7.3%, respectively.

The Bank of Japan's decision came during the trading recess for stocks and bonds.

The BOJ raised its key rate to a 31-year high of 1.25% as had been widely expected, joining the U.S. Federal Reserve just days before and the European Central Bank last week in tightening policy to fight persistent inflationary pressures from soaring crude oil prices.

Dovish board members Toichiro Asada and Ayano Sato, both appointees of reflationist Prime Minister Sanae Takaichi, dissented from the decision.

The spotlight now falls on BOJ Governor Kazuo Ueda's 0630 GMT press conference as markets seek clues on the pace and extent of further policy tightening.

"Probably some were surprised because two members opposed the decision and maybe some were expecting some mention of a 50 basis point hike," said Tohru Sasaki, chief strategist at Fukuoka Financial Group.

"Ueda-san has to be very hawkish to keep the yen from depreciating, but I think it's a bit difficult for him to be so hawkish," Sasaki said. "He has to say that the BOJ will probably hike the policy rate again within this year."

After Friday's move, markets expect the BOJ to continue raising rates in 25-basis-point increments roughly once a quarter, doubling its previous pace of tightening.

Five-year JGB yields extended declines, similar to 2-year yields, to be down 3 bps at 2.265%.

However, 10-year yields pared declines, although they were still down 0.5 bp on the day at 2.985%.

The so-called super-long JGB yields flipped to be higher, with the 20-year yield up 1.5 bps at 3.85% and the 30-year yield up 3 bps at 4.105%.

Longer-dated bonds tend to reflect views on inflation and fiscal sustainability.

"Dissent by two members suggests political pressure on the BOJ has not entirely faded," said Kanako Nakamura, an economist at Daiwa Institute of Research.

"The reappointment of (Economy) Minister (Minoru) Kiuchi in the cabinet reshuffle also signals continued support for expansionary fiscal policy, raising concerns that fiscal stimulus could add to inflation pressures."