By Vaibhav Tandon

A Generational Exit

Desperate times call for desperate measures.  But decisions made during a crisis can have lasting impacts. 

In the late 1990s, the Bank of Japan (BoJ) reacted to the Asian financial crisis by purchasing domestic stocks, long considered too broad of an intervention by a central bank.  This became a major step in the exceptional expansion of the BoJ’s balance sheet, both in terms of size and composition.  Now, many years later, the central bank plans to unwind those holdings.

The BoJ kept its policy rate unchanged at the September meeting.  But it surprised markets by announcing intent to begin selling its holdings of Exchange-Traded Funds (ETFs) and Japanese Real Estate Investment Trusts (J-REITs).  Coming just over a year after the central bank unveiled a roadmap for quantitative tightening, this move is seen as another step toward policy normalization.  Deflation, a problem for decades, appears to have been conquered.

Market reaction has been fairly muted and is likely to remain so, given the glacial pace and limited scale of the unwinding. The BoJ intends to sell ETFs and J-REITs at an annual rate of about ¥625 billion, representing about 0.05% of total market value.

The planned pace of selling is similar to the one used when the BoJ sold stocks it had accumulated between 2002 and 2010, in the aftermath of financial crisis of the late 1990s.  That process spanned nine years and ended only recently in July 2025.

The BoJ Governor acknowledged that it could take more than a century to completely unwind these holdings.  A faster process would risk igniting a broader sell-off, as the BoJ holds roughly 7% of the Japanese stock market via ETFs and about 5% of the J-REIT market.  The BoJ’s 2021 shift from Nikkei-linked ETFs to those tracking the Topix triggered a 6% drop in the Nikkei over the following four sessions.

As of mid-September 2025, the BoJ holds about ¥80 trillion worth of ETFs and J-REITs.  At current prices, these holdings carry an unrealized profit of around ¥44 trillion.  This places the BoJ at an advantage to other central banks, whose bond holdings are underwater. 

While the pace of QT will be slow, the decision by the BoJ marks another step toward closing an extraordinary era of monetary policy.  The BoJ broke new ground with its asset purchases, and we welcome the signal that desperate times are in the past.