Bank of Japan’s “final step” in tightening… begins selling its ETF holdings

The Bank of Japan has begun selling exchange-traded funds (ETFs) on its books worth ¥37 trillion. While maintaining its tightening bias through policy rate hikes, the BOJ has moved from reducing Japanese government bond purchases—so-called quantitative tightening—to a “qualitative tightening” step of selling ETFs. The move is seen as Japan opening the final door toward monetary normalization after the large-scale easing policy known as “quantitative and qualitative easing” (QQE) deployed in the 2010s.

According to Nikkei on the 3rd, the BOJ began selling ETFs and real estate investment trusts (REITs) in January. January sales totaled ¥5.3 billion in ETFs on a book-value basis and ¥0.1 billion in REITs. As of end-January, the BOJ held ETFs worth ¥37.1808 trillion on a book-value basis and REITs worth ¥654.7 billion. On a market-value basis, it held ¥83.2 trillion of ETFs and ¥0.8 trillion of REITs as of end-September last year.

At its September monetary policy meeting last year, the BOJ decided to dispose of ETFs by about ¥330 billion a year on a book-value basis and REITs by about ¥5 billion. To minimize market impact such as a sharp stock decline, it set the share of ETF and REIT sales proceeds in total market turnover at around 0.05% each. Governor Kazuo Ueda said at the time, “By a simple calculation, it would take more than 100 years (to dispose of everything),” adding that “it is appropriate to proceed little by little to avoid market disruption.”

After returning to power at the end of 2012, then-Prime Minister Shinzo Abe in 2013 touted “unprecedented” easing to break free of deflation and had the BOJ fire what was dubbed “bazooka money.” It bought government bonds without limit to cap rises in long-term yields (YCC), introduced negative interest rates, and even stepped up ETF purchases.

As Japan’s long-stagnant inflation began to stir, the BOJ entered a path toward normalization. In March 2024, it raised the policy rate for the first time in 17 years, scrapping the negative-rate policy in place since 2016. From August 2024, it began quantitative tightening by cutting monthly bond purchases by ¥400 billion each quarter. Now, by starting ETF sales, it has moved into qualitative tightening.

Markets had been watching when and how the BOJ would unload its ETF holdings. The BOJ had been unable to move easily on ETF sales due to concerns about a stock-market decline. However, with the Nikkei 225 hitting a record high, speculation has emerged that the BOJ judged it could sell ETFs. The Nikkei 225 also rose as high as 54,782 at one point that day, setting a new intraday record.

Tokyo=Correspondent Kim Il-gyu black0419@hankyung.com