Japan's BOJ ETF holdings eyed to fund planned sales tax cut

A senior executive from Japan's ruling Liberal Democratic Party (LDP) has proposed utilizing the Bank of Japan's (BOJ) substantial holdings of exchange-traded funds (ETFs) as a potential source of funding for a planned sales tax cut. This suggestion brings the central bank's vast asset portfolio into the political spotlight, indicating a potential shift in how such holdings are viewed.

The government recently approved Prime Minister Sanae Takaichi's flagship policy to slash the sales tax on food items from 8% to 1% for a period of two years. This move is proceeding despite significant concerns regarding Japan's already strained public finances. Takaichi has pledged to avoid issuing new debt to cover the estimated annual revenue shortfall of approximately 5 trillion yen ($31.71 billion), seeking alternative non-tax revenue sources.

Daishiro Yamagiwa, a senior LDP lawmaker and member of the party's tax panel, suggested that proceeds from selling the BOJ's 37 trillion yen ETF holdings could be considered to bridge this funding gap. Yamagiwa argued that under the BOJ's current plan, it would take a century to divest these holdings, and given the current high stock prices, accelerating the sales pace would not be detrimental. "Stock prices are so high now that it won't hurt to think about speeding up the pace of sales," he stated in an online program aired Tuesday.

Currently, the BOJ is gradually selling its ETF holdings at an annual pace of around 330 billion yen, as part of its strategy to dismantle its massive stimulus measures implemented over 13 years. The central bank has previously stated its intention to proceed slowly to avoid disrupting the stock market while unwinding its balance sheet. The proposal to expedite these sales could face scrutiny regarding its potential impact on market stability and the BOJ's long-term monetary policy objectives.

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Under the BOJ's current plan, it would take a century to sell all of its ETF holdings. Stock prices are so high now that it won't hurt to think about speeding up the pace of sales.