The Bank of Japan’s ETF Unwind: Policy Normalization and Its Implications for Global Markets 2026

by Dr. Christoph Lymbersky

The Bank of Japan (BoJ) is preparing to embark on one of the most significant shifts in its monetary policy framework in decades: the gradual sale of its massive stock exchange-traded fund (ETF) holdings, potentially beginning as early as January 2026. This move marks a key step in the central bank’s efforts to normalize policy after years of ultra-accommodative measures designed to combat deflation and stimulate growth. With ETF holdings valued at approximately ¥83 trillion (around $534 billion) as of late 2025—representing about 7% of the total Japanese stock market capitalization—the unwind could have ripple effects not only on the Nikkei 225 but also on global financial markets and the Global Markets 2026.

This development comes amid broader policy tightening, including recent interest rate hikes that have strengthened the yen and contributed to the partial unwinding of the infamous yen carry trade. While the BoJ has emphasized a cautious, gradual approach to minimize market disruption, the process underscores the challenges central banks face when reversing extraordinary stimulus programs implemented during crises.

Historical Context: The Origins of the BoJ’s ETF Purchases

The BoJ’s foray into equity markets began in December 2010, when it first introduced ETF purchases as part of its quantitative easing (QE) toolkit. This was an unconventional measure even by global standards at the time, aimed at supporting asset prices and encouraging risk-taking in an economy plagued by persistent deflation and stagnant growth.

The program gained significant momentum under former Prime Minister Shinzo Abe’s „Abenomics“ policies starting in 2013, which combined fiscal stimulus, monetary easing, and structural reforms. The BoJ ramped up ETF buying to inject liquidity directly into the stock market, effectively acting as a backstop against sharp declines. Legal constraints prevented the central bank from purchasing individual stocks directly, so it focused on ETFs tracking major indices like the Nikkei 225 and TOPIX.

Over the years, these purchases accumulated rapidly. By the peak of the program, the BoJ was buying up to ¥6 trillion in ETFs annually. This made the central bank a dominant player in the Japanese equity market: it became one of the top-10 shareholders in roughly 40% of the largest Nikkei-listed companies through its ETF holdings. Critics argued this distorted price discovery and created moral hazard, as companies benefited from implicit government support. Proponents, however, credited the program with helping stabilize markets during turbulent periods, including the COVID-19 pandemic.

As of September 2025, the market value of these holdings stood at ¥83.2 trillion, with a book value (purchase cost) of around ¥37.1 trillion, reflecting substantial unrealized gains from years of stock market appreciation.

The Decision to Unwind: Signals of Policy Normalization

The BoJ’s pivot toward unwinding began gaining traction in 2024 and 2025 as inflation finally took hold in Japan, driven by supply chain disruptions, a weaker yen, and rising import costs. After ending negative interest rates in March 2024 and implementing gradual rate hikes, the central bank signaled in September 2025 that it would start reducing its ETF portfolio.

The plan, as outlined in policy statements, involves selling ETFs at a pace of approximately ¥330 billion per year based on book value—equivalent to roughly ¥620 billion at market value. This deliberately slow tempo could stretch the process over decades, potentially a century in the baseline scenario, to avoid flooding the market and triggering sharp sell-offs.

Recent reports indicate that officials are considering accelerating the initial phase, with sales possibly commencing in January 2026. This follows smaller-scale reductions observed since around September 2025. The move aligns with broader balance sheet normalization, including tapering Japanese government bond (JGB) purchases and allowing yields to rise naturally.

Governor Kazuo Ueda and the policy board have stressed that sales can be paused or adjusted if markets become disorderly, reflecting lessons from past abrupt policy shifts elsewhere, such as the U.S. Federal Reserve’s quantitative tightening.

The Role of the Yen Carry Trade

A critical element intertwined with the BoJ’s policy shift is the yen carry trade. For years, Japan’s near-zero or negative interest rates made the yen an attractive funding currency for global investors. Borrowers would take low-cost yen loans, convert them to higher-yielding currencies (like the U.S. dollar), and invest in riskier assets worldwide—stocks, bonds, emerging markets, or even cryptocurrencies.

This dynamic helped suppress yen volatility while fueling asset bubbles globally. The BoJ’s ETF purchases indirectly supported this by propping up domestic stocks, preventing yen strength that might have discouraged carry trades.

However, as the BoJ has hiked rates—reaching 0.75% in December 2025 according to recent expectations—and signaled further normalization, the yen has appreciated. This increases borrowing costs for carry trade positions, prompting unwinds: investors repay yen loans, sell foreign assets, and buy back yen. The August 2024 carry trade turmoil, triggered by an earlier BoJ hike, saw global stock markets plunge temporarily, illustrating the interconnected risks.

The ETF unwind adds another layer. By removing the BoJ as a perpetual buyer (and eventual seller), it eliminates a perceived „put“ option on Japanese stocks, potentially leading to higher volatility.

Potential Market Implications for 2026 and Beyond

Implications for Global Markets 2026

For the Japanese market, the direct impact of gradual sales is expected to be muted. Analysts note that ¥620 billion annually represents a small fraction of daily trading volume on the Tokyo Stock Exchange. The Nikkei has already shown resilience, with limited negative reaction to the September 2025 announcement. Removing the „overhang“ of BoJ holdings could even be positive long-term, encouraging genuine price discovery and attracting private investors.

Globally, however, spillovers could be more pronounced. Yen strength from carry trade reversals may pressure export-oriented Japanese firms, while liquidity drainage affects correlated assets. Emerging markets and high-yield currencies often suffer during carry unwinds, as seen in past episodes.

Increased volatility is a common forecast for 2026. With the BoJ reducing its market footprint amid ongoing rate normalization, Japanese stocks may face greater swings, particularly if global growth slows or geopolitical risks escalate. This could transmit to other markets through reduced risk appetite.

In such environments, investors historically flock to traditional safe havens. Precious metals like gold and silver often benefit from uncertainty, as they offer hedges against currency debasement and inflation. Gold, in particular, has performed well during past carry trade disruptions and central bank tightening cycles. Similarly, Bitcoin and other cryptocurrencies—sometimes dubbed „digital gold“—may see renewed interest as non-fiat stores of value, though with higher volatility.

Central banks themselves continue accumulating gold, with net purchases in recent years signaling a diversification away from dollar-dominated assets.

Challenges and Outlook

The BoJ faces a delicate balancing act: normalizing policy without derailing economic recovery or sparking financial instability. Japan’s high public debt (over 250% of GDP) limits fiscal flexibility, making monetary policy crucial. Success depends on clear communication and flexibility, as evidenced by the option to halt sales during stress.

For investors, 2026 may bring heightened uncertainty. Diversification across asset classes, geographies, and currencies remains prudent. Monitoring yen movements, Nikkei volatility, and safe-haven flows will be key.

Ultimately, the BoJ’s ETF unwind represents the closing chapter of an era of extraordinary intervention. While risks exist, a measured approach could pave the way for a more sustainable Japanese market—and serve as a model for other central banks grappling with post-QE legacies.

References

• Bloomberg: Various articles on BoJ ETF sales (December 2025).
• Bank of Japan policy statements (September 2025).
• Reuters and Japan Times reports on monetary normalization.