Bank of Japan Begins ETF Sales, Signals Hawkish Shift

The Bank of Japan (BOJ) has unexpectedly initiated the sale of its Exchange Traded Funds (ETF) holdings, marking a significant step in its gradual withdrawal from large-scale stimulus measures. The decision, announced during a policy meeting on Friday, has sparked discussions about its potential impact on the market.

Despite the substantial scale of the sale, analysts suggest that the market impact will be limited. The BOJ plans to sell its ETF holdings at an annual rate of approximately 330 billion yen, which translates to a daily sale of around 20 million dollars. At this pace, it would take 112 years for the BOJ to completely liquidate its ETF holdings, indicating a minimal direct impact on the market.

The BOJ's decision to start selling ETFs is seen as a clear signal of a shift towards a more hawkish stance. The policy meeting also saw two members voting against maintaining the current policy, advocating for an increase in the short-term interest rate from 0.5% to 0.75%. This internal dissent highlights the growing pressure within the BOJ to normalize monetary policy more swiftly.

The BOJ's ETF holdings are substantial, with a market value of 74.5 trillion yen as of March. The central bank became the largest single holder of Japanese stocks during the period of aggressive monetary easing around 2020. However, the pace of the sell-off is relatively slow, with an annual sale of approximately 40 billion dollars, or around 20 million dollars per day.

Analysts generally agree that the actual market impact of this decision will be limited. The sale of ETFs is seen as a necessary step for the BOJ to reduce its exposure to private sector credit risk, a role that is considered unusual for a central bank. The impact on different asset classes is expected to be varied. While the sale may pose structural resistance to broad market indices like the TOPIX and Nikkei, it could benefit the banking sector through a steeper yield curve and improved net interest margins, provided the economic momentum remains stable.