The Bank of Japan’s Plan to Unload Exchange-Traded Funds
As part of the Bank of Japan’s (BOJ) ultra-loose monetary policy aimed at reflating a moribund economy, it has been purchasing exchange-traded funds (ETFs) for 13 years since 2010. With a market value of 70 trillion yen and a book value of 37 trillion yen, the BOJ now holds a significant amount of ETFs, which have not changed in recent years. The central bank stopped buying ETFs last year but has yet to decide on how it will unload its holdings when that time comes.
The BOJ’s decision on how to dispose of its ETFs is crucial as it would likely impact the country’s stock markets and cause disruptions in the market if not handled carefully. In order to minimize losses and avoid causing significant distortions, experts have recommended various strategies for the BOJ to follow when deciding how to get rid of its ETF holdings. Among these suggestions include transferring them to government entities or placing them into the public domain.
The key factors guiding the BOJ’s decision-making process are three-fold:
- to dispose ETFs at an appropriate price: This implies that the central bank needs to consider prices that reflect market value without incurring losses
- avoid causing disruptions in the market: To prevent unforeseen and destabilizing influences on financial markets, any decision regarding ETF disposal must minimize potential ripple effects
- ensure minimum loss for the BOJ: Any strategy implemented should prioritize minimizing financial loss for the central bank
When it comes to deciding how to transfer ETFs efficiently while upholding its key criteria, experts consider that a low-key approach is often better. Goldman Sachs analysts stated in their report:
However, the method which meets all three of our criteria will most probably be small-scale sales on the open market over time
Report Summary
A Goldman Sachs report highlights several possible approaches for BOJ officials to select from when they aim to unload ETFs that amount to 37 trillion yen. Of these options, buying and selling funds gradually over time is proposed as a practical yet efficient path forward.
Goldman Sachs analysts argue that there’s little reason to wait beyond fiscal years 2026-2027 before implementing this strategy since at this pace annual dispositions from both fiscal year 2026 onwards should remain around Â¥600 – Â¥1 trillion yen in book value per annum. It is worth noting Akira Otani, a member of the team that put together the analysis, provided invaluable insights given his background as president of BOJ’s financial markets department, giving credence to these projections.
