The BOJ must define a strategy for its ETF holdings - not just its sales

Central bank needs to decide what to do with what they hold until everything is sold

This article was originally published by Nikkei Asia

Markets broadly expect the Bank of Japan to hold steady on its policy rate at a monetary policy meeting this week. However, the central bank’s announcement following its September gathering that it would begin selling its holdings of exchange-traded funds (ETFs) and real estate investment trusts (REITs) — both accumulated through years of purchases — should not be overlooked as a defining moment in its long experiment with unconventional monetary easing. Unwinding these holdings responsibly is not just a technical challenge but a signal to the world about the resilience of Japan’s institutional framework.

The ETF-purchasing program, launched in 2010 as a limited measure, grew over time into one of the most visible symbols of Japan’s unconventional monetary policy experimentation. The BOJ has a reported book value of 37 trillion yen (around $243 billion) in ETF holdings on its balance sheet, with an estimated market value of 70 trillion yen to 80 trillion yen. This amounts to roughly 7% of Japan’s stock market capitalization, suggesting the market implications of the BOJ’s equity holdings and selling schedule are profound. The BOJ’s plans to sell these risk assets under a framework that emphasizes avoidance of financial losses and limiting destabilizing effects on markets. At the steady pace that the BOJ foresees selling its equity holdings, the central bank will remain one of the Japanese economy’s largest holders of shares for decades ahead.

The BOJ plans to sell its ETFs at roughly 620 billion yen a year on a market-value basis (330 billion yen on a book-value basis), a time frame under which BOJ Gov. Kazuo Ueda said it would “take more than 100 years” to sell them all. Furthermore, equity prices could outpace sales, leaving the BOJ’s equity exposure unchanged or even higher over time.

This ongoing ownership position carries significant implications — not just for monetary policy, but for corporate governance, financial stability and the very credibility of Japan’s institutions. The BOJ’s exit plan may have answered the “When?” and “How much?” of ETF sales, but lacks a clear strategy for the “What next?” of portfolio management during the long period in which the BOJ will remain one of the biggest shareholders in Japan.

ETFs expose the central bank to risks far outside its traditional remit. Equity market swings, sectoral shocks and governance controversies create additional financial and reputational risk. Irrespective of the exit strategy, the BOJ needs to define a strategic policy for its holdings. Two priorities stand out:

First, the BOJ must clarify its stewardship policy. As one of the country’s largest shareholders, silence is not neutrality. The BOJ’s abstaining from offering guidance on the voting rights on the underlying corporate shares its ETFs hold effectively supports the status quo. Delegating them without clear instructions to ETF managers gives those managers an outsized role in corporate Japan. It is encouraging that Governor Ueda acknowledged this role and announced that the BOJ will consider the impact of its holdings on corporate governance. But with sales scheduled to take more than a century, the Bank also needs a clear framework to ensure that such prolonged ownership does not amount to a form of state capitalism that distorts the functioning of Japan’s equity markets.

Other public investors have adopted clear frameworks for exercising shareholder rights. Japan’s central bank should do the same. Joining the Principles for Responsible Investment, a stewardship code convened by the United Nations and signed on to by public investors like the Government Pension Investment Fund, would be a strong start, as would publishing guidelines on proxy voting and engagement practices. Transparency here would reassure both markets and the public that the BOJ is using its unusual position responsibly and in the best interest of Japan’s population.

Alternatively, corporate governance could be exercised more clearly if the ETF risk assets are moved from the BOJ’s balance sheet and into a public interest vehicle in exchange for perpetual or long-dated bonds. Interim capital gains and dividends could be used to fund public investments and research to boost resilience and raise productivity in the face of structural risks such as climate and demographic change.

Second, the BOJ (or an alternative public interest vehicle) must rethink the reliance on market capitalization-weighted indexes. These indexes are overweight on large firms with entrenched market positions, rather than other features that are critical for the country’s long-term trajectory — from innovation to human capital to climate transition. The BOJ already has experience in allocating funding to ETFs tracking firms that proactivley invest in physical and human capital. It can build on this by reallocating its portfolio toward indexes that better align with Japan’s long-term priorities, including investing in innovation, human capital development and a climate-resilient green transition. Doing so would reduce the exposure of the BOJ’s balance sheet to systemic risk, while aligning with national policy goals.

The BOJ’s next steps will resonate far beyond its balance sheet. How it handles its ETF holdings will shape perceptions of Japan’s financial resilience and institutional maturity. Handled well, the BOJ can demonstrate that a central bank can normalize policy while embracing forward-looking risk management strategies, supporting economic resilience and enhancing sustainable welfare.

Ken Shibusawa, the great-great-grandson of Eiichi Shibusawa, is founder and chairman of Commons Asset Management, and CEO of Shibusawa and Company. Matthew Poggi is an economist, affiliated with the Council on Economic Policies and a visiting senior fellow at the London School of Economics Centre for Economic Transition Expertise.