The Bank of Japan's sale of ETF holdings has sparked controversy! Investors are worried that the stock market will be impacted.

On Friday, the Bank of Japan kept its benchmark interest rate unchanged at 0.5%, maintaining a wait-and-see approach for the fifth consecutive meeting, which was in line with market expectations. At the same time, the Bank of Japan announced that it would sell its holdings of exchange-traded funds (ETFs) and Japanese real estate investment trusts (J-REITS) in the market. Specifically, the Bank of Japan will sell ETF holdings at a pace of about 330 billion yen (face value) per year and sell real estate investment trusts at a pace of about 50 billion yen per year. This is the first time that the Bank of Japan has mentioned specific plans for disposing of its ETF holdings. As of the end of March 2025, the Bank of Japan held ETFs with a face value of 37 trillion yen and a market value of 70 trillion yen. According to calculations by strategists from Morgan Stanley Mitsubishi UFJ Financial Group, as of mid-September, the Bank of Japan's ETF holdings had a market value of approximately 79.5 trillion yen, with unrealized gains of about 43.8 trillion yen. Bank of Japan Governor Kikuo Iwata stated that the decision to sell ETFs is unrelated to stock market levels, and if the sale of ETFs and J-REITs proceeds at the established pace, it would take more than 100 years. Iwata stated that after the necessary preparations are completed, the sale of ETFs will begin. He mentioned that he does not believe there are significant drawbacks to holding ETFs, so they can gradually reduce their ETF holdings. Additionally, Iwata added that the ETF sales plan has the flexibility to be stopped when necessary, and adjustments may be made in the event of temporary market fluctuations. The Bank is currently not considering repurchasing ETFs as a monetary policy tool. It is reported that the Bank of Japan began purchasing ETFs in 2010, and its ETF holdings expanded sharply after the easing trend in 2013 and ended purchases in March of last year. Since then, the Bank of Japan has been researching specific selling methods. How will the sale of ETFs affect the market? Reducing the large ETF holdings will help the Bank of Japan behave more like a normal central bank. This action marks a new stage for the Bank of Japan after experiencing decades of unconventional monetary policy (including stimulating the economy by purchasing ETFs and fighting deflation), the Bank of Japan is trying to return to normalcy. However, the selling plan also carries risks at a time when the Japanese stock market is setting all-time highs this year, it could weaken market confidence in the Japanese stock market. Data shows that the Bank of Japan's stake in the stock market through ETFs amounts to about 7% of the total market value. On the day the Bank of Japan announced the ETF selling plan, shares of FAST RETAIL-DRS, the stock with the highest weight in the Nikkei index, fell by 4.5%. Large tech stocks, areas where the Bank of Japan has a larger exposure, may face selling pressure. A weakened Japanese stock market could threaten investor confidence in Japan's efforts to normalize its monetary policy. Why did the Bank of Japan initially buy ETFs? The Bank of Japan began purchasing ETFs in 2010 to revitalize the corporate sector by increasing the supply of funds, reducing the cost of capital, and encouraging more risk-taking activities in the economy. The Bank of Japan is the only major central bank injecting cash into the economy through ETF purchases, and such funds are typically owned by institutional and retail investors. Initially, the Bank of Japan heavily invested in the Nikkei 225 index ETF, which includes heavyweight companies in Japan. However, in 2021, the Bank of Japan revised its guidelines to only purchase ETFs tracking the broader TOPIX index. After Haruhiko Kuroda became the Bank of Japan Governor in 2013, the scale of asset purchases rapidly expanded, driving the Japanese stock market to rise the Nikkei index surged by 57% that year. However, the effects gradually diminished over time. The market volatility caused by the pandemic in 2020 led the Bank of Japan to increase its ETF purchases to a peak, after which it gradually decreased, with only three purchases in 2023. In March 2024, the Bank of Japan announced it would stop buying ETFs and simultaneously end its last remaining negative interest rate policy globally. Why has the Bank of Japan's ETF holdings been criticized? The Bank of Japan's initial purchase of Nikkei 225 index ETFs was controversial because the Nikkei index is a price-weighted index, meaning that a company's weight is primarily determined by the price of an individual stock. Critics argued that the Bank of Japan's purchasing plan favored a few stocks with higher weights in the Nikkei index. Another major criticism is that the Bank of Japan's massive ETF purchases and holdings distorted the market. Policy adjustments caused excessive fluctuations, such as in 2021 when the Bank of Japan switched from buying Nikkei ETFs to only buying TOPIX ETFs, resulting in a 6% decrease in the Nikkei index over the next four trading days. Additionally, the Bank of Japan's large holdings reduced the amount of floating stocks available for investors to purchase in the market and weakened shareholder influence on corporate governance.