BOJ to Gradually Offload ¥534 Billion in ETFs Starting January

The Bank of Japan is expected to begin selling its massive holdings of exchange-traded funds (ETFs) as early as January, according to people familiar with the matter. The central bank will offload the assets gradually to minimize market disruption, following a decision made at a September policy board meeting. The ETF holdings had a market value of ¥83 trillion ($534 billion) at the end of September according to Bloomberg.

The central bank plans to sell the ETFs at a pace of ¥330 billion per year based on book value. At that rate, the process is expected to take approximately 112 years if unchanged. The BOJ aims to make the market impact of the sales "almost unnoticeable," similar to its past asset sales in the 2000s.

The value of the ETF holdings has surged due to the recent rise in Japan's stock market. The BOJ is committed to maintaining a steady pace of monthly sales without causing financial market instability. However, the bank may halt the sales in the event of a crisis akin to the 2008 Global Financial Crisis.

Implications for Japanese Markets

Sumitomo Mitsui Trust Bank has been selected to conduct the ETF sales, winning an auction for the role earlier this month. The BOJ's decision to gradually divest its ETF holdings is part of a broader strategy to normalize monetary policy after years of unconventional stimulus measures. The central bank has maintained a historically low benchmark rate since 2007, despite recent inflationary pressures.

The ETF sales are expected to have a limited short-term impact on financial markets. However, they could signal a long-term shift in BOJ policy. By reducing its balance sheet, the BOJ is slowly moving away from years of aggressive monetary stimulus. This could eventually lead to a more market-driven Japanese economy, reducing reliance on central bank intervention.

Broader Economic Context

The BOJ is also expected to raise its key policy rate at its upcoming December 18–19 board meeting. Three sources familiar with the central bank's thinking confirmed that the BOJ is prepared to hike the policy rate to 0.75% from the current 0.50%. This move is seen as a response to persistently high inflation, which has exceeded the central bank's 2% target for over three years according to Reuters.

Markets have largely priced in the rate hike, with the USD/JPY pair trading near 155.98 ahead of the meeting. Analysts at OCBC note that USD/JPY is likely to consolidate in the near term as investors await more guidance on the BOJ's future policy path. Any meaningful recovery in the yen will depend on stronger fiscal discipline and a weaker U.S. dollar, according to the analysts.

The BOJ's gradual policy normalization is also being supported by broader structural changes in the Japanese economy. Private equity firms with insurance capital arms are increasingly pursuing investment opportunities in Japan, creating a new source of capital beyond traditional financing according to Reuters. This trend could lead to a surge in M&A activity over the next two to three years, especially as lower global interest rates make it easier for firms to finance growth-focused acquisitions according to Reuters.

What This Means for Investors

Investors are closely watching the BOJ's ETF sales and rate hike decisions for clues about Japan's long-term economic direction. The ETF divestment process is expected to take decades, but it signals a commitment to reducing the central bank's influence on financial markets. This could eventually lead to more efficient capital allocation and stronger corporate governance in Japan according to Investing.com.

For now, the key focus remains on the December rate decision and the broader impact of Japan's policy normalization on global markets. A deeper policy clash between the BOJ and the Japanese government could send Japanese government bond yields and the yen sharply higher, potentially disrupting the yen-carry trade according to Investing.com.

With the BOJ's balance sheet still larger than Japan's GDP, the central bank's gradual approach is intended to avoid sudden market disruptions. The pace of asset sales and rate hikes will continue to be influenced by economic data, global market conditions, and domestic policy developments.