Bank of Japan Unexpectedly Starts ETF Selling: Bold Move, Limited Impact?

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On Friday, the Bank of Japan kept interest rates unchanged at its policy meeting but unexpectedly announced the start of ETF sales, taking an important step in gradually unwinding measures left over from its large-scale stimulus policies.

After the announcement, the Nikkei 225 Index's decline briefly widened to 1.76% before narrowing. Analysts believe that although this decision is significant in terms of policy shift, the actual market impact may be quite limited.

Specifically, the Bank of Japan announced that it would sell its ETF holdings at a pace of about 330 billion yen per year and real estate REITs at about 5 billion yen per year. This is the first time the Bank of Japan has mentioned a concrete plan to dispose of its ETF holdings, which have a book value of about 37 trillion yen and a market value exceeding 74 trillion yen.

Although the sale amount appears huge, at the current pace it would take the central bank 112 years to completely clear its ETF holdings, with daily sales averaging only about $20 million, so the direct impact on the market is expected to be limited.

Clear Hawkish Signal in Policy Stance Shift

This meeting from the Bank of Japan sent a clear hawkish signal. SMBC chief currency strategist Hirofumi Suzuki said it was surprising. With the start of ETF sales and two votes against keeping the policy unchanged, although the status quo was widely expected, the result tilted hawkish.

There were also two dissenting votes from committee members, who advocated raising the short-term interest rate from 0.5% to 0.75%, adding a hawkish tone to the policy stance. Analysts believe these moves signal the Bank of Japan will steadily push forward with policy normalization.

The two dissenting votes highlight the growing hawkish pressure within the central bank. Saxo Chief Investment Strategist Charu Chanana pointed out that the objections from Takata and Tamura underscore these growing pressures. While the majority still prefer a steady path, the existence of two dissenters indicates that debate is tilting toward faster normalization.

Mizuho Securities chief strategist Shoki Omori called this a “hawkish hold.” The central bank vowed to closely monitor inflation trends, trade policy, and market developments. The marked delay in the statement's release was also an unusual development, fueling market speculation over unconventional measures.

Large Sale Amount but Gentle Pace

The central bank’s ETF holdings are indeed enormous. As of the end of March, their market value stood at 74.5 trillion yen. The central bank became the largest single holder of Japanese stocks during the large-scale monetary easing around 2020. Since the start of this fiscal year, the Nikkei 225 Index is up about 11%, further boosting the value of its ETF holdings.

However, the sale pace is relatively gentle. Based on annual ETF sales of 330 billion yen, this is just over $4 billion per year, with daily sales under $20 million.At this rate, it would take the central bank 112 years to completely clear its ETF holdings.

Ben Bennett, Asia investment strategy head at L&G Asset Management, said rates remained steady, but the asset sale announcement and two votes for rate hikes gave the meeting a hawkish tilt.

Market Impact Expected to Be Limited and Diverging

Despite major policy implications, analysts generally believe the actual market impact is limited. Masato Koike, senior economist at Sompo Institute Plus, said:

Given the limited scale (of ETFs and J-REITs) themselves, I don’t think there will be a significant impact on stock prices in the medium to long term. Establishing a clear path for dealing with the ETFs marks an important turning point.

Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research and Consulting, pointed out that while this is a negative factor, clearing out ETF holdings is the right step because it’s unusual for a central bank to bear private sector credit risk in the first place."

The impact on different asset classes will diverge. Chanana expects:

The roadmap for the central bank to clear its ETF/J-REIT holdings signals support from asset purchases is fading. This will pose structural headwinds to major indices like the TOPIX and Nikkei, though the impact will depend on the sell-off pace and signals given.

However, for banks, policy normalization may be a tailwind through a steeper yield curve and better net interest margins, provided the economic momentum remains steady.

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