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🏦 BOJ ETF Holdings Problem: The Triple Bind of Price Discovery, Corporate Governance, and Exit

I. Current Situation Assessment—The Scale of the Problem

The BOJ's ETF holdings balance reached 37.1861 trillion yen in book value and an estimated 76.2 trillion yen in market value as of end-June 2025, accounting for approximately 8% of the Tokyo Stock Exchange Prime Market's total market capitalization.

Oddly, despite beginning sales, holdings have continued to expand. The book value (market value approximately 90 trillion yen at end-2025) before sales began has now exceeded 110 trillion yen, becoming roughly three times book value.

Despite beginning sales, the BOJ's market presence has actually strengthened. As of May 2026, BOJ's indirect equity holdings exceed 10% in 80 companies, with 4 companies exceeding 20%.

II. Distortion of Price Discovery Function

❶ Disconnect from Fundamentals

BOJ ETF purchases may have impeded the price discovery process. The BOJ conducts no fundamental analysis and purchases primarily when markets are in decline.

Empirical evidence shows that securities with higher BOJ holdings have lower information content in prices. BOJ purchases have reduced price informativeness (measured by deviations from random walk and price delays) in held securities.

❷ Premium in Index-Constituent Securities

ETF purchases may have created overvaluation in some small-cap stocks, particularly those included in the Nikkei 225. BOJ's ETF purchases have tended to favor securities in the price-weighted Nikkei 225 over the capitalization-weighted TOPIX.

❸ Pressure on Market Liquidity

The ETF purchase program reduced trading volume through liquidity channels. BOJ announcements hindered market function; ETF purchases restricted the supply of tradable stocks, crowding out market participants and impeding risk-taking behavior, transaction costs, and price discovery.

III. Impact on Corporate Governance

❶ "Silent Shareholder" Problem

The BOJ has become the largest shareholder in the Japanese stock market, raising multiple issues regarding corporate governance through interference with market independence. First, it deprives capital markets of the opportunity to comprehensively evaluate corporate value, undermining the market's important function of value discovery.

The BOJ's failure to provide guidance on voting rights of securities held through ETFs effectively represents support for the status quo. By delegating voting rights to ETF operating companies without clear instructions, excessive roles are assigned to these operators.

❷ Relaxed Discipline and Moral Hazard

ETF purchases may have impaired corporate governance beyond merely reducing downside risk for purchased securities. Specifically, the structure of "the central bank will support stock prices regardless of management performance" weakens disciplinary measures on managers and dulls the vigilance of shareholder monitoring.

Since the BOJ purchases ETFs through external operating companies, it does not itself oversee how the changed equity ownership structure affects corporate governance. Therefore, BOJ monetary policy risks offsetting regulatory efforts toward improved corporate governance.

❸ Spillover to Capital Investment—Disappointing Results

Companies with significant BOJ-driven ETF demand saw promoted stock price appreciation and equity issuance, but no substantial increase in capital investment was observed; rather, increases in cash and liquid asset holdings were correlated.

IV. Is There an Exit?—Three Options and Structural Dilemma

Current Exit Plan

The Bank of Japan implemented its ETF disposal guidelines on January 19, 2026. By end-September 2026, it sold 230.4 billion yen (book value) compared to end-December 2025, yet 36.9557 trillion yen remains.

The BOJ plans to sell approximately $62 billion annually (330 billion yen in book value) in ETFs, but BOJ Governor Ueda stated this would take "over 100 years," with stock price increases potentially exceeding sales, risking long-term expansion of BOJ equity exposure.

Three Exit Options and Respective Difficulties

Risk disappears only for the BOJ; "national equity holdings" continue, leaving the market's official coloration intact.

During sales spanning more than a century, the Bank of Japan will remain one of Japan's largest shareholders, requiring clear frameworks to prevent long-term holdings from becoming a form of state capitalism that distorts Japanese stock market function.

The "Sales Don't Reduce Holdings" Paradox

While selling only 330 billion yen annually, the market value of held ETFs increases by trillions annually through stock appreciation. This is precisely a "maze of exit"—raising sales pace risks market crash, while maintaining status quo allows holdings to continue expanding, a structural dilemma.

V. Remaining Issues

This continued holding position carries major implications not only for monetary policy but also for corporate governance, financial stability, and Japan's institutional credibility itself.

The BOJ should first clarify its stewardship policy. As one of Japan's largest shareholders, silence is not neutrality.

Summary—The Core of Structural Problems

【Distortion of Price Discovery】
  Large purchases ignoring fundamentals
  → Mechanical buying in downturns forms "artificial floor"
  → Stock price information efficiency and market liquidity decline

【Hollowing of Corporate Governance】
  Voting rights substantively "adrift" (BOJ → ETF operators → companies)
  → Managerial discipline malfunctions
  → Funds stagnate in internal reserves rather than capital investment

【Exit Dilemma】
  Sales pace (330 billion yen annually) << Holdings expansion through appreciation (trillions annually)
  → "100-year plan" approximates permanent holding
  → Accelerated sales = market crash risk, structural trap

The BOJ's ETF problem, as an "aftermath of unprecedented easing," transcends mere monetary policy issues, presenting the fundamental question: Can Japan's capital markets truly function in a capitalist manner?

The Bank of Japan's massive shareholding through ETF purchases has several important impacts.

Impact on Price Discovery

1. Market distortion: When a central bank purchases shares on a large scale, market prices may cease to reflect actual supply-demand relationships. Stock prices that should be determined by supply-demand balance can fluctuate due to central bank intervention, making it harder to reflect true corporate value.

2. Reduced volatility: Because a stable buyer exists for policy purposes, stock price fluctuations may be suppressed. While this may initially appear positive, it represents a drawback in that the price discovery mechanism weakens.

Impact on Corporate Governance

1. Changes in shareholder role: When the Bank of Japan is a major shareholder, the possibility increases that active monitoring and pressure on companies will weaken. Since central banks typically avoid direct involvement in corporate governance, external pressure on company decision-making decreases, risking looser governance.

2. Ethical and political issues: While constraints exist against exercising shareholder influence to achieve policy or economic objectives, such an arrangement risks exerting lateral influence on company strategy.

Exit Strategy Challenges

1. Sales risk: When disposing of large ETF holdings accumulated over time through market sales, the market can face significant impacts. This can substantially affect supply-demand dynamics and trigger sharp price fluctuations.

2. Timing and method: To minimize market impact, careful planning and gradual sales are necessary. Additionally, strategy regarding when and how to sell is critical.

Summary

While BOJ intervention offers short-term market stabilization benefits, long-term drawbacks include impediments to price discovery and impacts on corporate governance. Exit strategy is also a complex issue requiring careful consideration.

The situation where the Bank of Japan has become a substantial shareholder in many listed companies through ETF purchases affects the market's price discovery function and corporate governance in various ways, with exit strategies also being discussed.

Impact on Price Discovery Function

Many point out that Bank of Japan's ETF purchases bring distortions to market price discovery function.

• Divergence between stock prices and fundamentals: The BOJ's continuous and mechanical purchases increase the likelihood that stock prices operate at levels not based on companies' fundamental economic conditions. This significantly impairs the market's inherent ability to quickly correct prices deviating from theoretical values.
• Decline in market liquidity: When theoretical values become unclear, price volatility risk increases, and investors tend to refrain from equity investment based on individual company research and analysis (active management). This reduces trading volume and serves as a factor lowering market liquidity.

Impact on Corporate Governance

BOJ's ETF purchases affect corporate governance.

• "Silent shareholder" status: The BOJ indirectly holds shares through ETFs, with voting rights primarily exercised by ETF composition companies. Since these companies aim to track stock indices, they have low incentives to incur the costs of monitoring individual companies' management status.
• Reduced tension in management: With a central bank as the largest shareholder, companies' performance is underpinned by stock prices even with poor results, making it difficult for managers to feel tension, potentially delaying corporate renewal.
• Governance deterioration claims: A 2024 study indicated that BOJ's ETF purchase policy deteriorated corporate governance in enterprises. Conversely, a 2025 report suggests BOJ's ETF purchases improved listed companies' corporate governance.

Exit Strategy

The Bank of Japan terminated new ETF purchases in March 2024. However, the disposal of already held ETF amounts, or exit strategy, involves the following issues and options being debated.

• Sales pace: In September 2025, the BOJ indicated a policy of gradually selling ETFs at an annual pace of approximately 330 billion yen (book value basis). On a market value basis, this is estimated at approximately 620 billion dollars, representing an extremely small proportion of total market trading.
• Extended disposal period: At this pace, complete disposal of held ETFs would require over 100 years (some calculations suggest 171 years), making it an extremely long-term strategy.
• Market impact and financial risks: Large-scale sales risk adversely affecting stock prices, which is why the BOJ emphasizes a stance of avoiding market disruption. Additionally, should stock prices decline sharply, the BOJ could face substantial losses, potentially leading to negative equity, threatening currency credibility and BOJ independence.
• Alternative options: Beyond market sales, proposals include transfer to public institutions or citizens, though these alternatives also entail various difficulties: time to complete disposal, need for substantial fiscal resources, adverse stock market effects, and concerns about wealth inequality expansion. Government loss compensation arrangements are also possible options but might contradict BOJ independence.

The state where a central bank (BOJ) becomes a major stock market holder through ETF purchases creates distortions in the price discovery function and has complex impacts on corporate governance, with the exit approach being pursued through an extremely gradual process.[[1]](https://asia.nikkei.com/economy/bank-of-japan/bank-of-japan-quietly-embarks-on-etf-sale-set-to-last-a-century)[[2]](https://asia.nikkei.com/spotlight/comment/bank-of-japan-s-etf-sales-are-starting-gun-for-new-wave-of-corporate-reform)

Current Scale (as of 2026)

BOJ's ETF holdings reach approximately 37 trillion yen in book value (around 36.95 trillion yen as of September-October 2026), enormous in magnitude. While representing approximately 2.65% relative to total market capitalization of Tokyo-listed shares, individual companies show indirect BOJ holdings exceeding 5% for hundreds of firms, with some cases surpassing 20%. Estimates on market value basis suggest holdings of 70-90+ trillion yen.[[3]](https://stock-marketdata.com/boj-balancesheet.html)[[4]](https://en.macromicro.me/charts/26280/jpy-boj-holding-etf)[[5]](https://itcareer40.jp/boj-etf-sales-pace-holdings-balance/)

The BOJ discontinued new purchases around March 2024, initiating sales from January 2026 following September 2025 decisions.

Impact on Price Discovery

• Distortion and inefficiency: Continuous large-scale BOJ purchases stabilize prices while reducing investor "opportunities to buy at lower prices," distorting price formation. Mechanical purchases through index-linked ETFs direct funds toward poor-performing and illiquid companies, potentially weakening the market's corporate selection function.[[1]](https://asia.nikkei.com/economy/bank-of-japan/bank-of-japan-quietly-embarks-on-etf-sale-set-to-last-a-century)[[6]](https://kikumoto-taxfp.com/%e6%97%a5%e9%8a%80%e3%81%8c%e4%bf%9d%e6%9c%89%e3%81%99%e3%82%8b94%e5%85%86%e5%86%86%e3%81%aeetf%e3%80%80%e4%b8%ad%e5%a4%ae%e9%8a%80%e8%a1%8c%e3%81%8c%e5%b7%a8%e5%a4%a7%e6%a0%aa%e4%b8%bb%e3%81%a8/)
• Liquidity and information efficiency decline: Some research indicates BOJ programs may have reduced target securities' liquidity and decreased price informativeness.[[7]](https://www.sciencedirect.com/science/article/pii/S0275531925001801)
• Overall, demand-side factors risk decoupling price formation from fundamentals (corporate value).

Impact on Corporate Governance (Dual-Faced)

Effects are two-sided.

• Positive aspects: Evidence suggests passive holdings increases contributed to governance improvements. Specifically, observed changes include abolition of anti-takeover provisions, increases in outside and female directors, board size reduction, stock option adoption, and dividend payout ratio increases. Institutional investors may find it easier to act based on stewardship codes.[[2]](https://asia.nikkei.com/spotlight/comment/bank-of-japan-s-etf-sales-are-starting-gun-for-new-wave-of-corporate-reform)[[8]](https://www.jcer.or.jp/jcer_download_log.php?f=eyJwb3N0X2lkIjoxMzAxOTYsImZpbGVfcG9zdF9pZCI6MTMwMTk3fQ==&post_id=130196&file_post_id=130197)[[7]](https://www.sciencedirect.com/science/article/pii/S0275531925001801)[[9]](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3894249)
• Concerns: The BOJ itself delegates voting rights to ETF operating companies without engaging in active shareholder involvement or divestiture threats, risking weakened management discipline. A "non-divesting major shareholder" may foster management entrenchment. While operating company voting behavior gains substantial influence, the BOJ's neutrality and explicit stewardship policy clarity are needed.[[1]](https://asia.nikkei.com/economy/bank-of-japan/bank-of-japan-quietly-embarks-on-etf-sale-set-to-last-a-century)[[10]](https://asia.nikkei.com/opinion/the-boj-must-define-a-strategy-for-its-etf-holdings-not-just-its-sales)

Exit Strategy Existence and Challenges

An exit exists but is extremely gradual and long-term.

• Following the September 2025 decision, an annual disposal pace of approximately 330 billion yen (book value basis), or approximately 620 billion dollars (market value basis), was established, implemented from January 2026. This pace would require over 100 years for complete disposal of holdings, designed to minimize market disruption.[[1]](https://asia.nikkei.com/economy/bank-of-japan/bank-of-japan-quietly-embarks-on-etf-sale-set-to-last-a-century)[[2]](https://asia.nikkei.com/spotlight/comment/bank-of-japan-s-etf-sales-are-starting-gun-for-new-wave-of-corporate-reform)[[11]](https://www.bloomberg.com/news/articles/2025-09-19/japan-etfs-why-the-boj-is-unwinding-its-537-billion-stockpile)[[5]](https://itcareer40.jp/boj-etf-sales-pace-holdings-balance/)
• As of October 2026, holdings remain massive; despite sales progress, the BOJ continues as major holder for extended periods.
• Additional factor: Tokyo Stock Exchange Prime Market's TOPIX component reforms (approximately 40% reduction direction) will substantially decrease BOJ's indirect shareholdings count, though this represents separate mechanism from BOJ's own sales.[[12]](https://stockexpress.jp/boj_etf20261013/)[[13]](https://www.nikkei.com/article/DGXZQOCD1108O0R11C26A0000000/)
• Challenges: Treatment of sales gains, stewardship policy clarity during long holding periods, and market neutrality maintenance remain outstanding.

Rapid sales create downward stock price pressure, so caution takes priority.

In essence, BOJ ETF holdings—a byproduct of unprecedented easing—have delivered price-support and partial governance improvements while generating market efficiency and governance distortions, with exit constituting a "century-scale" ultra-long-term process. This remains a closely watched topic in policy normalization contexts. Consult latest BOJ materials and market analysis for detailed updates.