Bank Of Japan’s Holdings And Market Dynamics
The Bank of Japan holds about 7% of Japanese stocks through ETFs. Any reduction that exceeds market demand could destabilise prices. Remaining risks include political uncertainties and external tariff challenges, leading to close monitoring of high-weight stocks such as Fast Retailing, which decreased by 4.5%, and SoftBank, which increased by 0.7%.
In the long term, Japan’s stock market is expected to remain strong due to corporate governance reforms and positive domestic policy. Strategic expectations indicate resilience in the market, even as the reduction of ETF holdings is set to commence next year.
The Bank of Japan’s plan to slowly sell its ETFs reduces the risk of a market crash, making this a good environment for selling volatility. For traders, this means selling put options on the Nikkei 225 could be a viable strategy to collect premium from the market’s underlying stability. The Nikkei Volatility Index, after a brief spike, has settled back around 18, which is still elevated enough to make selling options attractive compared to historical lows.
Market Absorption And Future Risks
We believe the market can easily absorb this gradual selling pressure over the coming months. Foreign investors have already poured over ¥8 trillion into Japanese equities so far in 2025, while Japanese corporations have announced a record ¥12 trillion in share buybacks. This consistent demand should provide a strong floor for the market, preventing any major sell-off from the central bank’s actions.
Despite this positive outlook, risks from political leadership and global trade tensions remain. We saw a similar pattern in March 2024 when the BOJ ended its negative interest rate policy; the market absorbed the initial shock but remained sensitive to new information. Therefore, buying some out-of-the-money put options on the Topix index could serve as a cheap hedge against any unexpected policy mistakes or external shocks.
The most interesting opportunities may be in individual stocks rather than the broad index. Companies with heavy weightings in the BOJ’s ETFs, like Fast Retailing, will now face a small but constant headwind from the selling. This creates potential for pair trades, where a trader might short a basket of ETF-heavy stocks while going long firms with strong fundamentals but lower central bank ownership.
