BOJ Must Be Careful to Not Disrupt Stock Market with EFTs Sale

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At its recent monetary policy meeting, the Bank of Japan (BOJ) decided to sell on the open market exchange-traded funds (ETFs). BOJ had purchased them during its previous large-scale monetary easing initiative.

The pace of sales is expected to be about ¥330 billion JPY ($2.2 billion USD) per year on a book value basis. Real estate investment trusts, known as REITs, that the BOJ holds will also be sold.

BOJ's support of stock prices through ETF purchases, to a certain extent, helped the Japanese economy escape deflation. Nevertheless, they also produced negative effects in terms of distorting market functions, such as in the determination of fair stock prices.

It is reasonable for the bank to proceed with such sales now. Japan is transitioning from a monetary policy based on crisis response back to one for normal times.

Concerns to Watch For

That said, the BOJ needs to keep a watchful eye on stock prices. There are concerns that ETF sales will soften the balance between supply and demand in the stock market. That could lead to a fall in stock prices. Indeed, after the BOJ announced its decision, the Nikkei stock average temporarily slumped by more than 800 yen.

In the press conference following the decision-making meeting, it was only natural that Governor Kazuo Ueda promised, "We will take into consideration market stability and ensure flexibility."

*The Bank of Japan head office in Chuo-ku Tokyo. (©Kyodo)*

The bank must carefully monitor market trends to ensure that its sales do not become a disruptive factor in the market. It should also be prepared to carefully reconsider the pace and scale of the sales in response to different conditions.

The BOJ stopped purchasing new ETFs in the spring of 2025, when it ended its quantitative easing policy. Since then, it has been considering how best to dispose of its holdings.

Apart from the ETF purchases, the BOJ also purchased shares held by banks. However, it finished selling the last of those shares in July. Based on the knowledge gained at that time, the decision was made to also sell the ETFs.

With share prices currently hitting new highs every day, it appears to be an ideal environment for selling the ETFs.

Longer-term Uncertainty

The problem is that as of the end of March, the total book value of the BOJ's ETF holdings was a massive ¥37 trillion ($250 billion). It would take more than 100 years to sell the entire holdings at this pace.

It is impossible at this point to predict the economic trends and market conditions that might develop during that enormous span of time. The Bank of Japan has a responsibility to flexibly dispose of its ETFs so as not to restrict its policy operations for the long term.

Meanwhile, the decision meeting left the policy interest rate unchanged and postponed further rate hikes. Those moves no doubt reflect the economic uncertainty caused by the Trump tariffs.

Whether or not the US Federal Reserve can calmly manage policy without succumbing to pressure from the Trump administration to sharply lower interest rates will have a major impact on the Japanese economy as well.

It is also important to keep that point firmly in mind.