Japanese Prime Minister Sanae Takaichi unveiled a plan on Friday to use proceeds from the Bank of Japan's sales of exchange-traded funds (ETFs) to finance her priority investment projects, as a market selloff driven by artificial intelligence (AI)-related concerns intensifies and threatens to erode tax revenue.
She said the government is closely monitoring the selloff. Analysts have warned that continued market weakness could weigh on the economy and disrupt the Bank of Japan's gradual monetary policy tightening plans.
Takaichi said she has noticed that share prices — especially in AI and chip-related sectors — are falling sharply, and that vigilance is necessary given the situation could spread globally. Speaking in Japan's parliament, she said the government's focus will be on "building a strong economy," including by increasing investment in areas where Japan has competitive advantages.
On Friday, the Nikkei 225 index fell more than 5% at one point. Earlier, a sweeping victory by the U.S. Democratic Party in midterm elections fueled concerns that AI-related spending could be scaled back, triggering a broad market selloff.
The sharp decline has intensified the challenges facing the Japanese government: it wants to increase spending while avoiding a bond selloff triggered by expanded debt issuance. A government official, speaking on condition of anonymity, said tax revenue could come in below initial expectations if the stock market continues to fall.
Meanwhile, to raise funds to support an ambitious spending plan, the Japanese government is also seeking non-tax revenue sources. Takaichi said the government plans to use proceeds the Bank of Japan gains from incremental sales of its ETF holdings to fund areas critical to Japan's economic security.
She noted: "The additional proceeds from the (ETF) sales are the fruit of Japan's economic growth; reinvesting them in crisis management and growth-promoting areas is appropriate." Takaichi added that the proceeds will be set aside to repay bonds issued to fund public spending in key areas of Japan's economic security.
On October 30, the Bank of Japan decided to increase its annual sales of ETF holdings from 330 billion yen (about $2.2 billion) to 860 billion yen (about $5.5 billion). A portion of the Bank of Japan's annual net profit, including gains from ETF sales, is paid into the national treasury. The Bank of Japan has said it will seek to minimize market disruption when reducing its ETF holdings, and that the move will be conducted independently of fiscal or political considerations.
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