Bank of Japan Begins Unwinding Massive Asset Holdings

Bank of Japan Osaka branch in Kita-ku, Osaka, Japan (Wikimedia Commons)

The Bank of Japan (BOJ) announced plans to begin offloading portions of its vast portfolio of exchange-traded funds (ETFs) on September 19, according to Reuters, indicating confidence in the economy but raising concerns about market volatility. The BOJ began buying shares in 2010 as a part of its strategy to stimulate markets and combat deflation. 

The decision, the Wall Street Journal reports, signals a shift from the “ultraloose policies of the Abenomics era,” said StoneX senior market analyst Matt Simpson. This era was characterized by the pro-growth policies advanced by former Prime Minister Shinzo Abe who focused on expanding government spending. 

According to Japan Times, BOJ Governor Kazuo Ueda stated that the aggressive purchases “fulfilled the intended objective” of Japan’s stimulus strategy, but given that the economy was improving, “there was no longer a need to continue the measure.” The BOJ is set to offload around ¥330 billion ($2.23 billion) of ETFs annually. At this pace, Ueda says it will take more than a century to completely offload its ¥37 trillion ($251 billion) ETF portfolio, a deliberate cautious pace to avoid market destabilization, per the Wall Street Journal. 

The market responded strongly to this decision. The Nikkei 225 index fell as much as 1.8 percent before closing 0.6 percent lower on that day. Prior to the announcement, the index had just set record highs, rising 1.2 percent, reports the Financial Times. 

The BOJ has also left the policy rate (a key short-term interest rate) of 0.5 percent unchanged as it assesses the U.S. tariffs and domestic political volatility. Two BOJ policy board members, Hajime Takata and Naoki Tamura, dissented, proposing an increase to 0.75 percent deeming quicker normalization was necessary, according to Reuters.

Economists agree that implications will only materialize gradually. While the BOJ’s pace of ETF sales is slow, they signal confidence in Japan’s economic recovery. Some economists in the Wall Street Journal forecast that the policy rate will remain unchanged until next year, while others expect it to change as soon as October if prices and wages are on a stable track. Ultimately, the BOJ’s recent decisions point to a long-awaited pivot in Japan’s monetary policy.