The Bank of Japan unexpectedly launches ETF sell-off: Big step, limited impact?

Analysts believe that although the scale of the sell-off may seem huge, at the current rate, it will take 112 years for the central bank to completely clear its ETF positions. The average daily sell-off is only about US$20 million, and the direct impact on the market is expected to be limited.
On Friday, the Bank of Japan left interest rates unchanged at a policy meeting, but unexpectedly announced that it would start ETF sell-off, taking an important step in gradually withdrawing from the legacy measures of large-scale stimulus policies.
After the news was released, the decline in the Nikkei 225 index once widened to 1.76%, and then narrowed. Analysts believe that although this decision is of great significance in policy shifts, the actual market impact may be quite limited.
Specifically, the Bank of Japan announced that it will sell ETF positions at a rate of approximately 330 billion yen per year and real estate REITs at a rate of approximately 5 billion yen per year. This is the first time the Bank of Japan has mentioned a specific plan to dispose of its ETF positions, which have a book value of approximately 37 trillion yen and a market value of more than 74 trillion yen.
Although the scale of the sell-off may seem huge, at the current rate, it will take 112 years for the central bank to completely clear its ETF positions. The average daily sell-off is only about US$20 million, and the direct impact on the market is expected to be limited.
The Bank of Japan's meeting sent a clear hawkish signal. Hirofumi Suzuki, chief monetary strategist at SMBC, said that this was surprising. With the start of ETF sell-off and two votes against maintaining the policy unchanged, although it was expected to directly maintain the status quo, the results were biased towards hawkish.
The meeting also saw a negative vote from two members, who advocated raising short-term interest rates from 0.5% to 0.75%, adding a hawkish tone to the policy stance. Analysts believe that this series of measures indicates that the Bank of Japan will steadily advance the policy normalization process.
The opposition vote from two members highlighted growing hawkish pressure within the central bank, with Saxo chief investment strategist Charu Chanana pointing out that the opposition from Takata and Tamura highlighted growing hawkish pressure within the Bank of Japan. While most still prefer a steady path, the existence of two members opposing today's decision suggests that the debate is tilting towards faster normalization.
Shoki Omori, chief strategist at Mizuho Securities, called it a "hawkish maintenance" and the central bank promised to pay close attention to inflation trends, trade policies and market developments. The apparent delay in the release of the statement was also an unusual development, fueling market speculation about unconventional measures.
The size of the central bank's ETF positions is indeed alarming. As of the end of March, the market value of its ETF holdings reached 74.5 trillion yen, and the central bank became the largest single holder of Japanese stocks during the large-scale monetary easing period around 2020.The Nikkei 225 index has risen about 11% since the start of the fiscal year, further pushing up the value of its ETF holdings.
However, the pace of selling was relatively moderate. Based on the annual selling scale of 330 billion yen, this is equivalent to just over US$4 billion per year, with an average daily selling volume of less than US$20 million. At the current rate, it will take 112 years for the central bank to fully liquidate its ETF positions.
Ben Bennett, head of Asian investment strategy at L G Asset Management, said interest rates remained stable, but the asset sell-off announcement and two votes in favor of raising interest rates gave the meeting a hawkish tilt.
Although the policy is significant, analysts generally believe that the actual market impact will be limited. Masato Koike, senior economist at Sompo Institute Plus, said:
Given the limited size itself (ETFs and J-REITs), I don't think there will be a significant impact on stock prices in the medium to long term. Establishing a clear path forward for ETF processing represents an important turning point.
Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research Consulting, pointed out that although this is a negative factor, clearing up ETF positions is the right step because it is unusual for central banks to assume private sector credit risk.“
The impact on different asset classes will be divided.Chanana predicts:
The central bank's roadmap for clearing out ETF/J-REIT positions shows that support for asset purchases is fading. This poses structural resistance to large-market indices such as the TOPIX/Nikkei, although the impact depends on the pace and signals of selling.
For banks, however, policy normalization could become a tailwind through a steeper yield curve and better net interest margins, provided that economic momentum remains stable.
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