Japan to use BOJ ETF sale proceeds as AI rout raises fiscal fears
Japanese Prime Minister Sanae Takaichi announced plans to use proceeds from the Bank of Japan's increased sales of exchange-traded funds to finance investment projects, as an AI-driven market rout threatens tax revenue. The Nikkei average fell over 5 per cent on Friday, complicating the BOJ's intere
Japanese Prime Minister Sanae Takaichi unveiled a plan on Friday to tap proceeds from the central bank's sales of exchange-traded funds (ETF) to finance her flagship investment projects, as a deepening AI-fuelled market rout threatens to dent tax revenue.
The government is keeping a close watch on the selloff, she said, with analysts warning sustained market weakness could weigh on the economy and disrupt the Bank of Japan's gradual tightening plans.
"I am aware share prices, particularly those of AI and chip sectors, are falling sharply," which requires vigilance as it would affect countries across the globe, Takaichi said. "Our focus, however, would be to create a strong economy," by boosting investment in sectors where Japan holds a competitive edge, the prime minister told parliament.
Japan's Nikkei average fell more than 5 per cent on Friday as fears of a pullback in AI spending after the Democrats' midterm-election sweep triggered a broad market rout. The slump heightens challenges for an administration keen to boost spending without triggering a bond selloff by increasing debt issuance. A government official, who spoke on condition of anonymity due to the sensitivity of the matter, said tax revenue could fall from initial expectations if stocks continued to slide.
Takaichi said the government will use proceeds from the BOJ's increased sales of its ETF holdings to fund spending on areas critical to the country's economic security. "Additional proceeds from the (ETF) sales are fruits of Japan's economic growth, so it's appropriate to reinvest them for spending on crisis management and growth areas," she said. The proceeds will be set aside for redemption of bonds that will be issued to fund public spending on areas critical to Japan's economic security, Takaichi added.
The BOJ decided on October 30 to increase annual sales of its ETF holdings to 860 billion yen (US$5.5 billion) from 330 billion yen. A portion of net profit the central bank reaps each year, including from the ETF sales, is paid to state coffers. The central bank has said it will unload its ETF holdings in a way that causes minimum disruption to markets, and independently of fiscal or political considerations.
Some analysts warn that if the latest market rout persists, it could complicate the BOJ's plans to steadily lift its policy rate from 1.25 per cent, a level that remains low by international standards. "Unless the yen spikes in a way that eases inflationary pressure, the BOJ will probably stay its course and keep raising rates," said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities. "But the market rout may give the BOJ an excuse to take a wait-and-see stance for longer than expected. It will certainly make its communication leading up to December difficult."