Bank of Japan Plans Gradual ETF Sale Amid Political Uncertainty

The Bank of Japan is reportedly considering the sale of its ETF holdings, with a gradual and phased approach emerging as the preferred method. The central bank has been accelerating its plans to reduce its massive ETF portfolio, with multiple high-ranking officials recently signaling that the sale is imminent. However, the timing of this policy remains the biggest uncertainty.

Vice Governor Uchida has stated that the bank is considering how to handle its ETF and real estate investment trust assets, indicating that action is imminent. In contrast, Governor Ueda has emphasized that the decision is not urgent. If the Bank of Japan proceeds with the ETF reduction, it could mean that assets totaling 37 trillion yen (approximately 251 billion USD), accumulated since 2010, will gradually enter the market. Unlike bonds, equity assets such as ETFs do not naturally mature and settle, so they must be actively sold to be removed from the balance sheet, impacting stock market liquidity and valuations.

Currently, political instability in Japan, following the resignation of the Prime Minister, has made the timing of the Bank of Japan's announcement of the sale details and schedule the biggest variable affecting global markets and local asset prices. The preferred strategy within the Bank of Japan is a phased, small-batch, gradual sale, rather than alternative methods such as transferring to state-owned institutions. The vice governor's remarks suggest that the bank will draw on its experience from 2002 to 2010 in disposing of bank stocks, using long-term, small-amount, multiple transactions to avoid market disruption from selling pressure.

From 2002 to 2010, the Bank of Japan purchased stocks from banks to ease financial pressure. This stock disposal plan took 20 years and was completed in July of this year. One insider noted that this has paved the way for the bank to begin selling ETFs. The Bank of Japan started buying ETFs in 2010, with holdings surging dramatically after the 2013 quantitative easing. Although new ETF purchases have ceased since the end of large-scale stimulus last year, the existing 35 trillion yen in holdings still face pressure to be actively "digested" through market actions.

Selling ETFs is seen as the final step by Governor Ueda to conclude the large-scale monetary stimulus experiment initiated by his predecessor. Unlike Japanese government bonds, which automatically fall off the balance sheet upon maturity, ETFs have no maturity date and will remain on the books unless actively sold by the bank. Therefore, selling ETFs is a necessary step for the Bank of Japan to normalize its balance sheet. A member of the Bank's Policy Board, Kazuyuki Masu, stated in July that "no one thinks maintaining the status quo is acceptable, so we need to reduce holdings at some point." However, he also emphasized that the bank must proceed with "extreme caution" given the potential market impact of the sale.

For a long time, the Bank of Japan has remained publicly silent on when or how it will sell ETFs, only stating that it will do so at an "appropriate" price to avoid losses or significant market disruption. The biggest unknown remains the timing. Currently, the Bank of Japan has not reached a consensus on when to make a decision. Analysts believe that the bank is unlikely to decide on ETF sales at the upcoming policy meeting on September 19, but Governor Ueda may comment on the matter during the post-meeting press conference. Originally, the rise of the Nikkei average to a historical high provided a good window for the bank to act in the coming months. However, the resignation of the Prime Minister has caused weeks of political uncertainty. The ruling party will hold a leadership election on October 4, and the Bank of Japan faces risks if it acts prematurely before the new government's policy direction is clear.

An inappropriate decision on timing could invite criticism from the political sphere or unnecessary attention. For example, the largest opposition party, the Constitutional Democratic Party of Japan, has proposed using the dividends from the Bank of Japan's ETF holdings to fund childcare expenses. Initiating asset sales during political turmoil could entangle the bank in complex political maneuvering. Another insider stated, "I don't think the Bank of Japan is in a hurry, but this is something it ultimately needs to accomplish."