According to informed sources, the Bank of Japan (BOJ) may begin selling its holdings of exchange-tradedindex funds(ETFs) as early as next month, with this process expected to take several decades to complete.
Zhitong Finance APP learned from informed sources that the Bank of Japan may begin selling its holdings of exchange-traded index funds (ETFs) as early as next month, with this process expected to take several decades to complete. According to the BOJ, as of the end of September, the book value of the ETFs held by the central bank was 37.1 trillion yen, with a market value reaching 83 trillion yen (approximately USD 534 billion).
It is reported that in September this year, the BOJ announced it would sell its holdings of ETFs and JapaneseReal Estate Investment Trustfunds (J-REITs). Specifically, the BOJ will sell its ETF holdings at an annual pace of approximately 330 billion yen (book value) and real estate investment trusts at an annual pace of approximately 5 billion yen. This marks the first time the BOJ has mentioned a specific plan for disposing of its ETF holdings.
At the time, BOJ Governor Kazuo Ueda stated that the decision to sell ETFs is unrelated to stock market levels. If the sales of ETFs and J-REITs proceed at the planned pace, it will take over 100 years. Ueda noted that once the necessary preparations are completed, the sale of ETFs will commence. He added that he does not believe there are significant drawbacks to holding ETFs, allowing for a gradual reduction. Furthermore, Ueda mentioned that the ETF selling plan has the flexibility to be halted if needed, with adjustments possible in the event of temporary market volatility. Currently, the BOJ does not consider repurchasing ETFs as a monetary policy tool.
However, concerns have been raised that selling its ETF holdings amid this year’s strong performance of the Japanese stock market could undermine market confidence in Japanese equities. In response, informed sources indicated that the BOJ aims to sell its ETF holdings without causing market fluctuations, similar to how it largely completed the sale of bank shares acquired during the 2000s financial crisis by July this year—this process took about a decade without disrupting financial markets.
Informed sources also stated that the BOJ aims to maintain a steady monthly pace of selling ETFs. They added that the BOJ remains committed to minimizing market disruptions. However, sources revealed that in the event of a situation akin to the 2008 global financial crisis, the central bank might halt the sale of ETFs.
The sale of its holdings in ETFs and J-REITs by the Bank of Japan is seen as a significant step toward moving away from long-term ultra-loose monetary policy and heading toward policy normalization, carrying strong symbolic meaning. Notably, the Bank of Japan is prepared to raise interest rates by 25 basis points this Friday, increasing the benchmark rate to 0.75%, which would be the highest level since 1995.
Meanwhile, market attention is focused on how actively the Bank of Japan will signal further rate hikes. Market participants also hope to find clues about the neutral interest rate from Kazuo Ueda's speech. The Bank of Japan estimates the neutral interest rate to be within a broad range of 1% to 2.5%. Market participants are eager to know whether the Bank of Japan will indicate, based on the latest data, that the lower bound of this range has been raised, which would suggest more room for rate hikes.
Why did the Bank of Japan initially start buying ETFs?
The Bank of Japan began purchasing ETFs in 2010 to revitalize the corporate sector by increasing the supply of funds to lower capital costs and encourage more risk-taking activities in the economy. The Bank of Japan is the only major central bank injecting cash into the economy through ETF purchases. Such funds are typically held by institutional and retail investors.
Initially, the Bank of Japan heavily invested in ETFs tracking the Nikkei 225 Index, which includes heavyweight Japanese companies. However, in 2021, the Bank of Japan revised its guidelines to purchase only ETFs tracking the broader Topix Index.
After Haruhiko Kuroda became the governor of the Bank of Japan in 2013, the scale of asset purchases expanded rapidly, driving up the Japanese stock market — that year, the Nikkei Index surged 57%. However, the impact gradually diminished over time. In 2020, market volatility caused by the pandemic led the Bank of Japan to push ETF purchases to their peak, after which the scale gradually declined, with only three purchases made in 2023. In March 2024, the Bank of Japan announced it would stop purchasing ETFs while simultaneously ending the world's last negative interest rate policy.
Why has the Bank of Japan's ETF holdings been criticized?
The Bank of Japan’s initial purchase of ETFs tracking the Nikkei 225 Index was highly controversial because the Nikkei is a price-weighted index, meaning a company’s weighting primarily depends on the individual stock price. Critics argued that the Bank of Japan’s purchase program favored a small number of stocks with high weightings in the Nikkei Index.
Another major criticism is that the Bank of Japan’s massive ETF purchases and holdings distorted the market. Policy adjustments triggered excessive volatility; for instance, in 2021, when the Bank of Japan shifted from purchasing Nikkei ETFs to only buying Topix ETFs, the Nikkei Index fell 6% over the next four trading days. Additionally, the Bank of Japan’s significant holdings reduced the number of tradable shares available for investors to purchase in the market and weakened shareholders’ influence on corporate governance.
