Bank of Japan’s Holdings and Market Dynamics

The Bank of Japan owns about 7% of Japanese stocks through ETFs. If they sell too many, it could push prices down. Other risks include political uncertainty and external trade issues. Investors are closely watching key stocks like Fast Retailing, which fell by 4.5%, and SoftBank, which rose by 0.7%. Over the long term, Japan’s stock market is likely to stay strong thanks to improvements in corporate governance and positive domestic policies. Despite the Bank of Japan starting to reduce ETF holdings next year, strategic expectations suggest the market will remain resilient. The Bank of Japan’s slow selling of ETFs helps lower the chance of a market crash, making it a favorable time for betting against volatility. For traders, selling put options on the Nikkei 225 may be a good strategy to earn premiums from the market’s stability. The Nikkei Volatility Index spiked briefly but has leveled off around 18, which is still high enough to make selling options appealing compared to past lows.

Market Absorption and Future Risks

We think the market can easily handle the gradual selling pressure in the coming months. So far in 2025, foreign investors have invested over ¥8 trillion in Japanese stocks. Additionally, Japanese companies have announced a record ¥12 trillion in stock buybacks. This steady demand should support the market and help avoid major sell-offs caused by the central bank’s decisions. Even with this positive outlook, risks from political leadership and global trade tensions still exist. A similar situation occurred in March 2024 when the Bank of Japan ended its negative interest rate policy. The market reacted initially but remained sensitive to new developments. Therefore, purchasing some out-of-the-money put options on the Topix index could be a cost-effective hedge against unexpected policy errors or external disruptions. The best opportunities may lie in individual stocks rather than the broader index. Companies that are heavily weighted in the BOJ’s ETFs, like Fast Retailing, might face consistent selling pressure. This opens up opportunities for pair trading, allowing traders to short a group of ETF-heavy stocks while going long on companies with strong fundamentals but less central bank ownership. Create your live VT Markets account and start trading now.

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