The Bank of Japan (BoJ) has made a number of changes to its ETF buying programme in a sign it is looking to wean off the $430bn stock purchases made over the past decade.

Last Friday, the BoJ announced it was removing its $55bn annual target for ETF purchases as well as halting the purchases of Nikkei 225 ETFs for the first time in a decade.

As of 1 April, the Japanese central bank will only purchase ETFs that track the broader Topix index which consists of approximately 2,190 stocks.

The central bank added it will continue to have the $110bn annual limit on what can be purchased which was brought in last March to tackle the rapid spread of coronavirus.

BoJ governor Haruhiko Kuroda confirmed on Monday the announcement did not mean the central bank would stop ETF purchases entirely adding the changes would give its quantitative policy “more flexibility”.

Chart 1: BoJ ETF purchases, as of 1 April

Source: BoJ

The move caught markets by surprise with the largest stock in the Nikkei 225, Fast Retailing, falling 6.1% following the news, the most since March 2020.

Overall, the flagship Japanese index is down 4% to 28,996 points since the announcement on Friday highlighting the impact BoJ can have on the market.

Tackling the Bank of Japan's ETF dilemma

The BoJ first started buying Nikkei 225 ETFs in 2010, however, criticism over the years has led the central bank to slowly reduce purchases.

This happened in 2016 and 2018 meaning Nikkei 225 ETFs were only 25% of its purchases while Topix ETFs made up the remaining 75%.