In a move that represents a radical shift in monetary policy for the world's third-largest economy, the Bank of Japan (the central bank) is preparing to begin selling its massive holdings of exchange-traded funds (ETFs) and real estate investment trusts (J-REITs), signaling the beginning of the end for years of unprecedented monetary stimulus.
Details of the exit plan
According to official reports and data, the Bank of Japan plans to sell exchange-traded funds (ETFs) at an annual rate of approximately 330 billion yen (US$2.08 billion), in addition to selling real estate investment trusts (REITs) at an estimated annual rate of around 5 billion yen. In an official statement released today (Friday), the bank explained that the regulatory guidelines for these asset sales, approved by the board of directors last September, will take effect on January 19, paving the way for the actual sales to begin in the coming days.
Historical background: The legacy of quantitative easing and the fight against deflation
To understand the significance of this decision, one must consider the historical context that led the Bank of Japan to accumulate these assets. For over a decade, specifically since the launch of its Abenomics economic program, the central bank has pursued an extremely loose monetary policy that included large-scale asset purchases. The primary objective of this strategy was to inject liquidity into the markets to support the Japanese economy and combat the "monster" that had threatened Japan for years: deflation and falling prices.
This policy has led to a massive inflation of the bank's balance sheet, with the Bank of Japan becoming one of the largest holders of Japanese stocks, an exceptional and unconventional situation for global central banks that usually only buy government bonds.
Implications of the shift and normalization of monetary policy
This latest move comes as part of the Bank of Japan's efforts to shrink its balance sheet and represents a broader strategy to return to "normal" monetary policy. After years of relying on unconventional stimulus tools to boost confidence and drive growth, the bank is sending a strong signal to markets that the Japanese economy is now resilient enough to withstand the pressures without direct and continuous intervention in the stock market.
Expected impact on financial markets
Although the announced annual sales volume (a total of 335 billion yen) is small compared to the Bank of Japan's overall portfolio, which is estimated at tens of trillions of yen, its significance lies in its symbolism. The bank is careful to ensure the withdrawal is very gradual to avoid shocks to the Tokyo Stock Exchange or the real estate market. Global markets are watching this shift closely, as central bank withdrawals from stimulus programs are a pivotal moment that affects global capital flows and asset prices.
