BOJ Set to Finish Offloading Bank Stocks Ahead of Schedule, Raising Questions About ETF Fate

The Bank of Japan (BOJ) is on track to complete the sale of billions of dollars worth of stocks acquired from distressed banks during the financial crisis two decades earlier than planned. This development raises speculation about the future of the BOJ's significantly larger holdings of exchange-traded funds (ETFs).

As of February 10, the book value of the BOJ's acquired shareholdings stood at ¥52.8 billion ($345 million). Given the average monthly selling rate of approximately ¥10 billion in recent years, the central bank could offload all remaining assets within five months. In 2015, the BOJ targeted March 2026 as the completion date for this divestment.

Analysts believe that the authorities would be hesitant to sell shares acquired from banks and ETFs simultaneously due to potential market volatility. An early completion of the bank stock divestment suggests that the BOJ may initiate discussions with market participants on the ETF sales process this year.

The ETF holdings remain a significant part of Governor Kazuo Ueda's policy agenda. While he has pursued a gradual unwinding of the ultra-accommodative policies implemented by his predecessor, Ueda has refrained from outlining specific plans for ETFs, despite raising interest rates and dismantling yield-curve control.

The BOJ holds approximately ¥37 trillion ($242 billion) of ETFs by book value, with a market value of ¥70.3 trillion as of September 2022. Nikkei 225 shares have surged 3.3% since then, almost four times higher than when the central bank commenced its ETF purchases.

The BOJ's ETF buying began in December 2010 as part of a monetary stimulus program aimed at boosting inflation. Former Governor Haruhiko Kuroda expanded asset purchases significantly, making the central bank the largest single holder of Japanese stocks. Ueda halted these operations in March 2023.

In comparison to the ETF holdings, the scale of the bank stock purchases was relatively small. The BOJ acquired these shares from November 2002 to 2004, and again from 2009 to 2010, to support financial system stability amidst significant bad debt issues. The bank's initial sale of these stocks commenced in October 2007 but was suspended a year later due to the global financial crisis.

The fate of the BOJ's ETF holdings has drawn attention from politicians, particularly in light of the nation's expanding fiscal spending and high public debt. The Constitutional Democratic Party of Japan has proposed transferring ownership of the assets to the government to fund childcare measures.

Analysts have suggested various options, including replicating Hong Kong's disposal of intervention-acquired stocks through a listed vehicle or creating an entity to sell the assets opportunistically.

While interest in the issue is growing, the BOJ has no pressing need to rush the disposal process. The bank earned ¥1.2 trillion in ETF dividend revenue in the fiscal year ending March 2024, providing substantial financial support amidst rising interest payments on bank deposits.

If the BOJ adopts a comparable pacing to its bank stock sales, the ETF divestment would take approximately 279 years.