Quantitative Tightening accelerated further. With its bank stocks gone, the BOJ may start selling its equity ETFs soon.
By Wolf Richter for WOLF STREET.
Quantitative tightening, in terms of the Bank of Japan’s vast holdings of Japanese Government Bonds, picked up speed in Q2 2025. The BOJ also continued to shed its loans – the other big method with which it conducted QE. Its holdings of commercial paper and corporate bonds continued to plunge and hit the lowest level since 2013. The BOJ sold its holdings of bank stocks down to near-zero. Only its small holdings of equity ETFs and Japanese REITS have been unchanged at peak level since Q4 2023. But they may be next.
Total assets at the end of Q2 fell quarter-over-quarter by ¥12.3 trillion ($84 billion), and year-over-year by ¥36.2 trillion ($248 billion), according to the Bank of Japan’s balance sheet data.
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Since the peak in Q1 2024, total assets have fallen by ¥38.9 trillion ($267 billion), or by 5.1%, to ¥717 trillion ($4.92 trillion), the lowest since Q4 2022, and back to about where they’d first been in Q2 2021.
Japanese government securities declined quarter-to-quarter by ¥8.4 trillion, to ¥567 trillion ($3.88 trillion), the lowest since Q1 2023. They amount to 79% of its total assets.
Nearly all of them are longer-term Japanese Government Bonds (JGBs); its holdings of short-term Japanese Government Treasury Bills were unchanged at just ¥1.7 trillion ($12 billion).
Year-over-year, its holdings of Japanese government securities fell by ¥21.0 trillion. Since the peak in Q4 2023, they fell by ¥24.8 trillion, or by 4.2%.
On July 31, 2024, when the BOJ announced details of its QT process, it also laid out a plan for accelerating QT in 2025, and this acceleration is now taking place.
In terms of the pace of quarter-over-quarter declines, Q2 was the fastest so far:
- Q2 2025: -¥8.4 trillion
- Q1 2025: -¥6.4 trillion
- Q4 2024: -¥3.1 trillion
- Q3 2024: -¥3.0 trillion
- Q2 2024: -¥1.2 trillion
- Q1 2024: -¥2.6 trillion
- Q4 2023: end of QE
Note: To reduce the complexity here, all quarters here are calendar quarters; but the BOJ operates on fiscal quarters, with its fiscal Q1 being the March to June quarter (Q2 here).
The BOJ’s government securities holdings move in three-month cycles due to the timing of when long-term bonds mature and when they’re replaced with newly issued bonds of the same type. The BOJ also makes quarterly data available and refers to quarterly data in its balance sheet discussions, which iron out the three-month cycles.
Loans declined by ¥2.2 trillion in Q2 from Q1, and by ¥12.4 trillion year-over-year, to ¥94.6 trillion ($648 billion), first seen in Q3 2020
Since the peak in Q1 2022, the outstanding balance has fallen by ¥57.0 trillion, or by 37%.
These loans accounted for 13% of the BOJ’s total assets in Q2. The BOJ provided loans to banks and other entities under several programs, including the pandemic-era loans that caused the total amount of loans outstanding to more than triple in two years:
Commercial paper and corporate bonds fell by ¥1.0 trillion in Q2 and by ¥3.0 trillion year-over-year, to just ¥4.9 trillion ($33 billion), the lowest since 2013.
Since the peak in Q4 2021, they have plunged by 57%. The BOJ stopped buying commercial paper and corporate bonds in early 2022, and its holdings have been running off the balance sheet as they mature.
While hyped endlessly in the QE-promoting media at the time, along with the BOJ’s purchases of equity ETFs, they were never a significant part of the BOJ’s QE operations. At their peak in Q4 2021, they accounted for only 2.2% of the BOJ’s total assets, and their share is now down to just 0.7%.
Equity ETFs, Japanese REITs, and bank stocks, which are traded in the stock market, have to be sold to come off the balance sheet – since they don’t mature, unlike the above assets.
In terms of the equity ETFs and Japanese REITs, the BOJ has not yet started selling them, but has been talking about selling them.
But it has been selling the stocks of Japanese banks that it purchased in the early 2000s and then again in 2009. The purchases of bank stocks ceased in 2010. In 2016, the BOJ started selling these stocks, in a process that it said would take 10 years to complete through March 2026.
The fear in the market is that once those stocks are gone, the BOJ would then begin selling its equity ETFs and J-REITs ever so slowly. And these bank stocks are now nearly gone.
The BOJ’s holdings of bank stock dropped to just ¥2.5 billion ($17 million), and at the recent pace of selling them, they will be gone in a few weeks.
The BOJ started buying ETFs in 2012 and stopped buying them in Q4 2023. It carries them at acquisition cost, not at market value. If market values fall substantially below acquisition cost, the BOJ would write them down. But the BOJ doesn’t write them up when market values rise.
Since reaching peak in Q4 2023, equity ETFs and J-REITs have been at ¥37.2 trillion ($260 billion) at acquisition cost, or just 5.0% of the BOJ’s total assets. They were always only a small part of the BOJ’s QE operations.
To shed them, the BOJ has to sell them outright in the market. Obviously, the BOJ doesn’t want to rattle the Japanese stock market. But with the bank stocks now sold down to near-zero, the ETFs are likely next.
The BOJ’s total stock-market-traded assets combined – bank stocks, equity ETFs, and J-REITs – have been declining due to the decline in its bank-stock holdings, but at a microscopic pace. Since the peak in Q4 2023, they have inched down by 1.0% to ¥37.84 trillion as bank stocks are in the process of vanishing from the balance sheet.
Looking at them under the microscope:
In case you missed it: Fed Balance Sheet QT: -$13 Billion in June, -$2.31 Trillion from Peak, to $6.66 Trillion. New Milestone: 3 Years of QT
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