A senior lawmaker within Japan's ruling Liberal Democratic Party has suggested tapping the Bank of Japan's vast exchange-traded fund holdings as a potential way to help finance Prime Minister Sanae Takaichi's planned reduction of the sales tax on food, a proposal that could place the central bank's balance sheet at the center of Japan's ongoing fiscal debate.

The Japanese government approved Takaichi's flagship policy on Wednesday, which would lower the sales tax on food items from 8% to 1% for a two-year period. The plan advances despite mounting concern over Japan's already strained public finances — the country carries the heaviest government debt burden among advanced economies, with gross debt exceeding 250% of GDP. Takaichi has pledged not to rely on new debt issuance to cover the resulting revenue shortfall, which is estimated at approximately 5 trillion yen, or roughly $31.71 billion, per year. Her government has indicated it will seek non-tax revenue sources to fill the gap.

Daishiro Yamagiwa, a senior lawmaker on the LDP's tax panel, raised the possibility during comments aired on an online programme Tuesday. He suggested that proceeds from selling down the BOJ's ETF holdings could serve as one option worth exploring. The central bank currently holds around 37 trillion yen in ETFs, accumulated over 13 years of purchases originally launched in 2013 under then-Governor Haruhiko Kuroda as part of his aggressive monetary easing programme, designed to help reflate Japan's economy during a prolonged period of stagnation.

Yamagiwa pointed out that at the BOJ's current pace of sales, fully unwinding the holdings would take roughly a century. With equity prices at elevated levels, he contended that a faster pace of divestment would not necessarily cause disruption.

"Under the BOJ's current plan, it would take a century to sell all of its ETF holdings. Stock prices are so high now that it won't hurt to think about speeding up the pace of sales," Yamagiwa said.

Under a framework established in September of last year, the BOJ has been selling its ETF holdings at an annual pace of approximately 330 billion yen. This forms part of a broader effort to gradually dismantle the remnants of its massive stimulus programme, which the central bank began scaling back after ending eight years of negative interest rates in March 2024. The central bank has stated that it deliberately chose a slow, measured pace to avoid disrupting the stock market as it works through the substantial stockpile built up over more than a decade of asset purchases.

Any acceleration of BOJ ETF sales beyond the current pace could introduce fresh supply pressure on Japanese equities, particularly if markets interpret faster unwinding as a signal that the central bank is prepared to depart from its cautious, market-friendly approach. The proposal also touches on the traditionally sensitive boundary between fiscal policy and central bank decision-making in Japan, where the BOJ's operational independence has at times been tested by political pressure. Given the BOJ's stated preference to avoid disrupting stock prices, any political push to hasten sales would likely be monitored closely by equity investors for indications of a shift in that stance.

The broader funding debate surrounding Takaichi's tax cut plan also keeps Japan's fiscal position in the spotlight. Her stated aim to avoid new debt issuance could have implications for Japanese government bond market sentiment if alternative funding sources prove insufficient.

Yamagiwa's remarks suggest the BOJ's ETF holdings may draw increasing political attention as Japan's government searches for ways to finance the tax cut without adding to the country's debt burden — a dynamic that could subject the central bank's asset unwind strategy to closer scrutiny in the months ahead.

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