BOJ keeps rates unchanged

TOKYO, Oct 11 (Reuters) - Japanese government bond futures dipped but stayed above their two-month low on Thursday after the Bank of Japan's policy board kept interest rates unchanged as widely expected, while gains in stocks weighed.

Futures rebounded from the day's low after the BOJ kept its benchmark interest rate steady at 0.5 percent on Thursday by an 8-1 vote, prompting investors to buy back bonds.

Some market players had feared that one or two other board members could side with Atsushi Mizuno, who had called for a rate hike in the last three months, after strong U.S. jobs data late last week.

But Mizuno was again the lone dissenter at the BOJ, and that cooled expectations of an interest rate hike by the end of the year.

"Those who had sold futures ahead of the BOJ's rate decision on a possible 7-2 board member vote covered their short positions," says a chief manager of treasury division at a Japanese bank.

"The market is back to normal because most people had expected an 8-1 vote with only Mizuno opposing keeping rates steady. And rising share prices need the market's attention."

The Nikkei share average's 1.6 percent rally (.N225: Quote, Profile, Research) and hedge-selling ahead of a 5-year bond auction on Friday also capped gains in JGBs, traders said.

Market players reacted little to a ratings upgrade by Moody's Investors Service, which raised Japan's domestic-currency government bond rating to A1 from A2, saying the move had been widely expected.

But investors were forced to cut positions in bond futures after the stock market rallied on Moody's rating announcement, they said.