In a surprise move, the Bank of Japan's policy board voted unanimously Friday to start unloading about ¥335 billion ($2.4 billion) a year of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITS).

Stocks sank immediately after the announcement.

The Nikkei 225 stock index, which hit a new record just after the open, dropped more than 1% as traders and investors got news of the ETF plan, which will help reduce the size of the central bank's massive balance sheet. The yen strengthened.

The central bank immediately downplayed the significance of the move.

The pace of sales, set at about ¥330 billion a year for ETFs and ¥5 billion a year J-REITs, was to minimize disruptive effects on the market, and may be reviewed at future policy board meetings, BOJ Gov. Kazuo Ueda said at a news conference on Friday afternoon.

It would take more than 100 years to sell off all the ETFs held by the BOJ at the speed decided on Friday, Ueda added.

The BOJ started purchasing ETFs in 2010 as part of its aggressive monetary easing program, undertaken to fight deflation. Purchasing volume was greatly expanded under former BOJ Gov. Haruhiko Kuroda, and as of this month, the book value of central bank ETF holdings was ¥37.1 trillion.

The central bank decided in March 2024 to end new purchases of ETFs and has since been examining how to conduct the disposal, Ueda said. After it completed the sale of stocks purchased from financial institutions this July, the bank determined it was appropriate to begin selling ETFs.

“This decision was not made with any particular stock price level or similar benchmark in mind,” he noted.

The market had not anticipated the announcement, and was especially surprised by the specifics of the plan.

“I assumed in some way they would be transferred to the government instead. So I was surprised both by the decision to sell them and by the timing of the announcement — in both respects, it was a complete surprise,” said Masamichi Adachi, economist at UBS Securities Japan.

The Nikkei 225 closed the day down 0.57%, after hitting an all-time high of 45,852.75 minutes after the open. It was the sixth record hit this month.

“I think the market was also surprised,” Adachi said. “That said, it’s not as if prices just plunged and kept collapsing. They bounced back a bit, then slipped again, but overall it doesn’t feel like a dramatic drop.”

Separately, in a 7-2 decision, the BOJ kept its key policy rate unchanged at 0.5% amid uncertainty related to tariffs and domestic politics.

The rate decision, issued following a two-day meeting of the bank's policy board, was anticipated by economists and analysts polled in surveys prior to the announcement and was issued as data continues to suggest a mixed outlook.

Board members Naoki Tamura and Hajime Takata objected to the decision, calling for an immediate rate increase instead.

Consumer inflation in August was 2.7%, down from 3.1% in July and below expectations. Core consumer inflation was also 2.7%, the first time below 3% in nine months but still above the BOJ's 2% target.

Inflation excluding fresh food and energy, seen by the BOJ as better reflecting the underlying inflation trends, was 3.3%.

Most BOJ watchers surveyed by Bloomberg earlier this month expected the central bank to increase rates by the end of January.

The shifting political landscape could affect decision-making by the BOJ, which is taking a wait-and-see approach as the leadership vote of the ruling Liberal Democratic Party approaches.

With Prime Minister Shigeru Ishiba set to step down in about two weeks, five candidates are expected to run in the LDP presidential election.

Sanae Takaichi, a conservative heavyweight who lost to Ishiba in a runoff last year, is widely seen as one of the strongest candidates to succeed him.

Formerly an economic security minister and a protege of ex-Prime Minister Shinzo Abe, Takaichi is known as a proponent of expansionary fiscal spending and monetary easing. During the LDP presidential race last year, she said it was “stupid” to raise interest rates.

In its decision, the BOJ also noted overseas risks that could affect its economic outlook.

“In particular, it remains highly uncertain how trade and other policies in each jurisdiction will evolve and how overseas economic activity and prices will react to them," the decision statement reads.

"It is therefore necessary to pay due attention to the impact of these developments on financial and foreign exchange markets and on Japan's economic activity and prices.”

The U.S. Federal Reserve cut its policy rate by 0.25 percentage point on Wednesday in Washington, following months of pressure for it to make a move lower from U.S. President Donald Trump and in the context of continued economic uncertainty.

It is expected to carry out two more cuts by year-end.