The prevailing read on the Bank of Japan is that it remains stubbornly cautious, tiptoeing through rate hikes while inflation runs hot and the yen slides. The Bank of Japan QT strategy, however, tells a rather different story, one the rate-hike narrative consistently buries.
A Balance Sheet in Retreat
Total assets on the BOJ’s balance sheet fell by ¥15.5 trillion in the quarter ended 30 September, and by ¥70.8 trillion year-over-year, to ¥625 trillion, the lowest level since March 2020. Since the peak of its holdings in the first quarter of 2024, the BOJ has shed ¥131 trillion, or 17.4% of total assets. That is a substantial reduction by any measure, compressed into a relatively short period.
For context: the Fed began quantitative tightening roughly two years before the BOJ, and the Fed has since stopped. The BOJ keeps going. Whatever one thinks of the pace of Japanese rate hikes (and the pace invites mockery) the QT programme is real, it is ongoing, and its effects on long-term yields are not subtle.
The 10-year Japanese Government Bond yield has moved to 3.09%, up from negative territory in 2020. The 30-year yield now sits at 4.21%. These are not the numbers of a central bank doing nothing. The Bank of Japan QT strategy, operating through the long end of the curve, is doing work that the policy rate is not.
Rate Hikes as Cover, QT as the Engine
Since its first rate hike in March 2024, the BOJ has lifted its policy rate to 1.25%, the highest level in 31 years, though the fanfare around that phrase should be measured against what 1.25% actually means for a heavily indebted economy. The rate-hike channel is not driving the bus. The consensus fixates on whether the BOJ will hike again and by how much; the more consequential variable is the pace and composition of balance sheet reduction.
JGB holdings fell by ¥14.3 trillion in the quarter, the largest quarter-over-quarter decline since the BOJ began QT, to ¥504 trillion. Since the 2023 peak, Japanese government securities on the balance sheet have dropped by ¥88.2 trillion, or 14.9%, and now account for 79% of total assets. The BOJ no longer holds any short-term Treasury bills. Loans, meanwhile, held roughly flat in the quarter at ¥68 trillion after a steep prior-quarter decline; from the peak in the first quarter of 2022, the outstanding loan balance has fallen by ¥83.1 trillion, or 55%, and now represents 11% of total assets.
The private credit portfolio is essentially being wound to zero. Corporate bond holdings fell by ¥560 billion in the quarter to ¥1.07 trillion. According to Central Banking, the BOJ’s commercial paper holdings fell by around 47% and its corporate bond holdings by 98% compared with 2024. Combined, the two categories have declined 91% from their peak. These were always a small corner of the balance sheet, but their near-elimination is a signal about the direction of travel.
The equity side is moving more slowly, and here the Bank of Japan QT strategy gets genuinely complicated. The BOJ began purchasing equity ETFs and J-REITs in 2011, carrying them at acquisition cost without marking to market. In the third quarter, it sold ¥90 billion of ETFs and J-REITs at acquisition cost. But with the Nikkei 225 having risen by roughly 500% since those purchases began, the market value of what was sold is a multiple of the book figure. The BOJ sold off its last bank stocks in the third quarter of 2025, completing a disposal process that began in 2016 and took nearly a decade. Combined ETF, J-REIT and bank stock holdings have declined just 1.3% from their peak, effectively a flat line on a 16-year chart.
The equity unwind is the slow lane. The bond and loan runoff is doing the actual work. As Wolf Street noted in its analysis of the BOJ’s balance sheet, the QT is substantial and impactful on long-term yields even if the rate-hike cadence appears almost performative. The market debate about when the BOJ will move rates by another quarter-point may be the wrong debate entirely. The balance sheet is already moving, and it is moving the curve.
