BOJ finishes offloading bank stocks, bringing attention to ETFs

Japan Times

17 hours ago

The Bank of Japan finished selling millions of dollars of stocks it bought from besieged banks during a domestic banking crisis in the early 2000s and the later Lehman Shock, ending a nearly two decade process and bringing closer market attention to the fate of its much bigger pile of exchange-traded funds.
The BOJ's holdings of the shares purchased from banks hit zero as of July 10, falling from ¥2.5 billion ($17.4 million) 10 days ago, according to its balance sheet report Monday. It's well ahead of a self-imposed deadline of March next year, although the milestone was expected to happen around this time after a steady drop of roughly ¥10 billion per month in recent years.
The offloading of the shares suggest that the BOJ's normalization process more broadly could be accomplished without disrupting financial markets, although it would take a considerable amount of time. The assets were originally bought as a crisis response measure, years before the introduction of the massive monetary easing program that Gov. Kazuo Ueda's board is now in the process of unwinding.
Between 2002 and 2010, the BOJ acquired about ¥2.4 trillion ($16.3 billion) of stocks from private banks in two separate periods to help stabilize the financial system at the time — initially seen as extraordinary steps to take for a major central bank.
The BOJ's actions in the years following have ultimately made those steps less shocking. The central bank became the biggest holder of Japanese stocks around 2020 and the size of the central bank's ETF holdings are now 15 times larger than the shares it obtained from beleaguered banks.
In a report Friday, Goldman Sachs economists noted that it's reasonable to expect the bank to start gradually selling ETFs in fiscal 2026 to minimize its loss and the impact on the stock market.
The BOJ began buying stocks held by banks in November 2002, after a severe banking crisis that saw bank shares tumbling for about three years. The central bank kept buying for about two years in a bid to help banks address their dire nonperforming loan problem. In the wake of the global financial crisis, the BOJ bought again between February 2009 and April 2010.
It's taken the central bank nearly 18 years to offload the shares completely, after it first began selling in October 2007. At the end of 2015, the BOJ said it would extend the selling duration by a decade, through to March 2026.
If the BOJ applies the same selling pace it did for the bank stocks, it would take more than 200 years to completely offload the far larger ETF holdings from its balance sheet.
"It fulfilled the intended objective,' Ueda said at a news conference last month, referring to the bank stocks buying initiative. "Offloading them isn't completely finished yet but so far it's been proceeding without negative market impact or financial loss for us.'
Getting rid of the bank stocks entirely helps lower the hurdle to consider ETFs, as the simultaneous sale of both asset types could risk a overly large negative impact on the markets.
Starting with the end of negative interest rates and expansionary asset purchases in March last year, the BOJ has been cautiously normalizing policy, with the latest updated government bond buying plan in June, illustrating its caution. Ueda's board decided to slow the pace of tapering the bond buying from the next fiscal year given recent heightened volatility in the bond market.
One BOJ policy board member said in April last year that the bank should reduce the ETF holdings to zero even if it takes time. At the same time, Ueda has kept his options open — in March he didn't rule out holding ETFs indefinitely.
From the perspective of the BOJ's financial health, there is little need to rush to dispose of its stock fund assets. The bank earned ¥1.4 trillion in revenue from ETF dividends in the fiscal year ended in March 2025. That's offering sizable support for the bank's finances at a time when the cost of paying interest to banks is bound to rise further in tandem with rate hikes.
The sizable ETF profits have drawn attention from investors and politicians. Some opposition party lawmakers are already calling for using the BOJ's ETFs to fund government finances. Some analysts say that the BOJ could hand out the ETFs to the public.
"As I have said many times, there is no change in our stance to take time to consider what to do with the ETF holdings,' Ueda told reporters last month.