The Bank of Japan unexpectedly accelerated the sell-off of ETFs. Why did the stock market interpret it as a positive sign?

The Zhitong Finance App learned that on Friday, while maintaining an 8-1 policy interest rate of 1.25% (high for 31 years), the Bank of Japan announced that it would increase the annual sales volume of exchange-traded funds (ETFs) from about 330 billion yen (book value) to about 860 billion yen, equivalent to about 0.1% of market turnover (previously about 0.05%), effective January 2027. At this rate, the time required for full clearance was shortened from the previous estimate of about 112 years to about 43 years.

At the time the news was announced, Nikkei 225 was under pressure from a sell-off in global technology stocks — it fell 3% in early trading and fell below 64,000 points; the decline narrowed to about 2% in the afternoon, and finally closed down 2.44%. Despite this, the market used the price to give the first price for this “surprise sale”: it was digestible.

The interest rate decision itself: a “boring standstill”, an unexpected acceleration

There is no doubt about the interest rate decision: 8 votes to 1 remained at 1.25%, and hawkish member Takada Chuang voted against it, advocating a direct interest rate hike to 1.5% — no member advocated cutting interest rates. The Bank of Japan has raised interest rates by 25 basis points each in June and September this year, which is significantly shorter than about once every six months from 2024-2025.

An accident in the ETF. The sale plan was finalized in September 2025 and launched in January 2026. Over the past year, the central bank assessed “running smoothly and has not had a significant impact on the market”; considering that stock market turnover continues to expand, the committee has now unanimously adopted an acceleration plan and retained flexible clauses — when financial market conditions change, sales can be temporarily adjusted or even suspended within the annual quota.

Calculation: The Bank of Japan purchased a total of 37.19 trillion yen of ETFs for the underlying stock market in the 2010s (total book value as of March 2024); the “43-year” clearance cycle, which is calculated by dividing the holdings at the end of September 2026 by the annual sales amount (book size), is an estimate rather than an established maturity date. If the market account ratio of ETFs sold since January 2026 is estimated, the book sales amount of 860 billion yen is approximately 2.46 trillion yen/year.

Why did Nikkei narrow its decline after falling into a bad spot

US technology stocks continued to fall overnight — Alphabet's revenue fell short of expectations, reviving concerns about AI capital expenditure. The Asian market relayed a decline, and chip testing equipment company Edwin Test and SoftBank Group both fell by more than 7%. Nikkei 225 fell 3% under pressure in early trading. After the announcement of the resolution and ETF news, it narrowed to about 2% in the afternoon.

The judgment of Yukihiro Kawanishi, senior strategist at Aizawa Securities, represents the majority: “At first glance, it is negative, but based on current daily turnover, the market impact is limited. Central bank holdings have reduced the number of shares that can be traded in the market, and sales may instead improve the liquidity of these individual stocks.”

Hiroshi Namioka, chief strategist at T&D Asset Management, pointed out another level: “Hardly anyone expected the central bank to speed up the sell-off. This is really surprising. But the central bank should only make a decision after evaluating market conditions such as turnover — this in itself conveys confidence to the market that “the sale will not distort the price.”

There are also cautious voices. Hiroshi Namioka (former Bank of Japan official), chief strategist at Fukuoka Financial Group, believes that holding such a huge amount of stocks “is not healthy for the central bank,” but announced at a time when the market is so weak, the timing was not ideal.

The reaction of the foreign exchange market and the bond market was closer to the safe-haven logic than the supply shock: the yen rose to a high of 157.115 against the US dollar, erasing most of the decline in October; the yield on 10-year Japanese bonds plummeted 5.5 basis points to 2.780%, the lowest closing since August 6 — stocks fell and bonds rose.

“Nearly three times faster” sounds ridiculous; 0.1% of transactions is the essence — this is a gradual exit, not a downsizing shock, let alone the central bank reserved the right to suspend. Second, half of the market's calm comes from the expansion of turnover, and the other half comes from the “central bank dares to sell” itself: it means that policymakers think the market is too big to need the central bank's hand.

Profits are expected to support Takaichi Sanae's finances

To understand this acceleration, we have to go back to the path of holding positions. In 2011, the Bank of Japan formed what is known as the “1% rule” — the TSE index fell 1% in early trading, and the central bank entered the market to buy ETFs in the afternoon; in this way, it announced the cessation of purchases in March 2024, with a total investment of 37.19 trillion yen. Since then, Japanese stocks have continued to rise for the next two years: Nikkei has risen 26% last year, and has risen by about 25% so far this year. The Eastern Stock Exchange Index has risen by about 16% — the market value of holdings has expanded significantly, and the central bank “has enjoyed considerable fluctuation.”

Economists have pointed out the fiscal implications: most of the realized proceeds from the sale will be paid to the national treasury, which will objectively support Prime Minister Takaichi Sanae's ambitious fiscal plans — including the proposed reduction in food consumption tax (the Bank of Japan's current forecast has not taken this impact into account).

In other words, a central bank exit is no longer a one-way draw: under a price difference of nearly three times between book and market value, it is a “handover with profit.”

Policy prospects: a declaration of victory, a door left for December

More important signals than ETFs are hidden in outlook reports. For the first time, the Bank of Japan officially confirmed that underlying inflation “is generally at a level that meets the 2% price stability target” — a victory declaration in the 14-year war for a central bank that has been struggling with deflation for most of its time since gaining independence in 1998; at the same time, it emphasizes that the policy “has entered a new stage,” and that raising interest rates every few months in the future is an option.

Forecast: The median real GDP growth rate for the 2026-2028 fiscal year was 0.7%, 0.7%, and 0.8%; the core CPI was 2.4%, 2.7%, and 2.3% — down 0.1 percentage points from the July forecast for FY2026 and up for 2027 and 2028. Tokyo's core CPI (leading indicator of national prices) for October has surpassed 2%. The oil price assumption is that Dubai crude oil will gradually fall from about 105 US dollars at present to about 70 US dollars at the end of the forecast period.

The market is ready for December. According to the economists' survey, all respondents expect the Bank of Japan to pave the way for interest rate hikes in December or January next year. Of these, 13 expect the end interest rate for this cycle to reach 1.75% to 2% by mid-2027. Masahiko Loo, chief fixed income strategist at State Street Investment Management, summed it up: “Uninteresting hold on, hawkish direction — the debate is no longer about whether the Bank of Japan will normalize, but where the final interest rate will fall. Japan is joining simultaneous global austerity.”

Currently, what determines the short-term direction of Japanese stocks is not the ETF supply, but the trend of interest rate hikes and AI transactions in December; the real long-term tension lies in the bond market — the central bank's shift from massive buyers to moderate sellers, compounded by the interest-rate hike cycle, something that the Japanese treasury bond market will slowly digest over the next few years.