Bank of Japan Holds Rates Steady, Plans to Start Selling ETFs

Bank of Japan Maintains Current Monetary Policy

On September 19th, the Bank of Japan (BOJ) announced its decision to maintain its benchmark interest rate at -0.1%, marking the fifth consecutive meeting without a change. This decision aligned with market expectations. Furthermore, the central bank announced its intention to begin selling its holdings of Exchange Traded Funds (ETFs). This signals a potential shift in the bank's strategy.

Decision Details

BOJ board members Takata Hajime and Tamura Naoki dissented, proposing an increase in the short-term interest rate target to 0.75%. They argued that upside risks to prices had increased, and the central bank should move its policy rate closer to the neutral rate. The BOJ's official statement indicated that the Policy Board, by a vote of 7 to 2, decided to maintain the uncollateralized overnight call rate at around 0.5%. Regarding ETFs and Japan Real Estate Investment Trusts (J-REITs), the board unanimously agreed to sell these assets according to basic principles, taking care to avoid any adverse effects on financial markets. The scale of the sale will be determined in proportion to the amount of stock purchased from financial institutions.

A Look at the Japanese Economy

The BOJ noted that the Japanese economy is recovering moderately as a whole, with some weakness in certain sectors. It also stated that the global economy is growing moderately, but faces some challenges due to trade policies and other factors. Exports and industrial production have remained generally stable, but have been negatively impacted by U.S. tariffs. Corporate profits have remained at high levels, despite the impact of tariffs on the manufacturing sector. Equipment investment has continued to increase moderately. Supported by improved employment and income conditions, private consumption has remained robust, despite the impact of rising prices on consumer confidence. Housing investment has remained relatively weak, and public investment has remained generally flat. Financial conditions have remained accommodative.

Inflation and Future Expectations

Regarding inflation, the Consumer Price Index (CPI) excluding fresh food has increased by between 2.5% and 3.0% year-on-year, driven by rising food prices such as rice. Expectations are that inflation will rise moderately. The BOJ expects the Japanese economy to slow down in the future, due to the slowdown in the global economy and the decline in corporate profits. However, accommodative financial conditions are expected to support the economy. The BOJ expects the Japanese economy to return to its growth path as the global economy recovers. The BOJ expects core inflation to remain weak due to the economic slowdown, despite the fading impact of rising food prices. However, the BOJ expects core inflation to gradually increase as economic growth accelerates and long-term inflation expectations rise. The BOJ expects core inflation to reach a level consistent with the price stability target in the second half of the forecast period in the July 2025 "Economic Activity and Prices" report.

Risks and Challenges

The Japanese economy faces many risks and challenges, including developments in trade policies and other factors, and the reactions of the global economy and prices. Therefore, it is essential to monitor these developments closely and their impact on financial markets and the Japanese economy.

Further Analysis

The Bank of Japan's decision to start selling ETFs represents a significant step towards normalizing monetary policy. However, it is crucial that this process is carried out carefully to avoid any disruptions to financial markets. Considering the global economic challenges, the BOJ is likely to remain cautious in its monetary policy in the near future. It is important to closely monitor inflation data and economic growth indicators in Japan to assess the impact of these decisions on the economy.

Understanding the ETF Sale

The BOJ accumulated a substantial portfolio of ETFs as part of its quantitative easing program. Selling these holdings represents a unwinding of that policy. While the BOJ aims to minimize market disruption, the sale could potentially put downward pressure on Japanese stock prices. The pace and method of the ETF sales will be crucial to watch. The impact on different sectors of the Japanese market is another key factor to consider. Sectors heavily represented in the ETFs might experience more pronounced effects.