A large overhang that threatened the Japanese equity market is being removed with the Bank of Japan laying out a century-long plan to offload its massive holdings of exchange-traded funds (ETFs).

While benchmark stock gauges fell Friday in a knee-jerk reaction when the central bank said it would be selling its ¥75 trillion ($507 billion) stockpile, traders quickly pared much of the decline as focus turned to the very gradual nature of the program. The BOJ intends to reduce its holdings by about ¥620 billion by market value per year.

The announcement also came at the end of a week that saw the blue-chip Nikkei 225 and broader Topix index set fresh record highs. The market’s resilience to shocks over the past two years underscores the confidence, with shares recovering first from the BOJ ending negative interest rates in 2024 and more recently rallying in the face of tariffs from the U.S.

Japanese shares led gains among major markets in Asia on Monday, with the Nikkei rising 1.5% during the morning session and the Topix gaining 0.9%.

"Investors had been nervous about when the BOJ would start selling ETFs — a lot of them have been asking me about it,” said Seiichi Suzuki, chief equity analyst at Tokai Tokyo Intelligence Laboratory. The time frame for the sell-down of ETFs is positive and suggests limited market impact, he said.

Global investors have contributed to the advance in Japanese stocks as they seek to diversify their portfolios, with equities in Tokyo trading at lower price-to-earnings and price-to-book valuations than those in the U.S.

Corporate governance reforms have also helped by encouraging buybacks, mergers and acquisitions activity and the emergence of activist investors as a powerful force for championing focus on shareholder returns.

The BOJ’s ETF sales could begin early next year, a person familiar with the matter has said.

Before then, the market still faces potential turbulence from uncertainty over the ruling Liberal Democratic Party selecting a new leader, and the continued risk of economic fallout from tariffs.

Given that the BOJ indirectly owns about 7% of Japanese stocks via ETFs, any miscalculation in its sales that exceeded market demand could still be damaging.

Yet the current amount indicated by the central bank should be easily absorbed, said Kohei Onishi, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities. He noted that Japanese companies, under pressure from regulators and shareholders to stop cash hoarding, are buying back a large amount of their own shares annually.

Investors will be closely watching the impact of ETF sales on stocks with heavy weighting on the Nikkei 225, such as casual clothing chain operator Fast Retailing and billionaire Masayoshi Son’s SoftBank Group. Fast Retailing shares slid 4.5% on Friday while SoftBank’s stock rose 0.7%. Both stocks rose on Monday morning.

Initially, the central bank had focused its buying on ETFs tracking the Nikkei, and it was criticized for warping markets with these purchases. It changed to buying funds tracking the Topix in 2021.

The BOJ’s hold over ETFs breaks down to around ¥17 trillion for the Nikkei and about ¥51.2 trillion for the Topix in market value, according to data compiled by Bank of America.

Japanese equities may see some short-term stress but the BOJ’s plan won’t scupper the market’s bull trend, according to Anna Wu, cross-asset strategist at VanEck Associates in Sydney.

"If we ask ourselves, will the new prime minister be pro-growth? Will fiscal expansion continue? And are foreign investors going to continue investing in Japan equities as part of U.S. diversification trade? The answers are likely to be 'yes' for all three,” she said.