BoJ Poised to Ease Bond Tapering Amid Market Volatility Fears
Japan's central bank is expected to slow the reduction of its bond purchases next year, sources suggest, as it navigates an uncertain economic landscape and recent surges in long-term bond yields
Investors and analysts are keenly observing the Bank of Japan (BoJ) ahead of its anticipated announcement on the Quantitative Tightening (QT) plan for the upcoming fiscal year.
The central bank is reportedly considering a more gradual approach to reducing its bond purchases, a move prompted by concerns over potential market volatility following a sharp rise in long-term bond yields, all set against a backdrop of increasing economic uncertainty.
This crucial decision, part of its broader QT strategy, is expected to be a key talking point during discussions this Tuesday.
The aim is to prevent significant disruption in financial markets as the BoJ delicately unwinds more than a decade of aggressive monetary stimulus.
This prolonged period of easing has suppressed interest rates and swelled the BoJ's balance sheet to a size almost mirroring the nation's entire economy.
Navigating the QT Path
Market participants are closely scrutinising how the policy board will address its current fiscal year's bondholding reduction plan.
Attention is also turning to the expected announcement of a new strategy that would extend this programme through fiscal year 2026.
However, sources close to the matter have indicated to Reuters that the BoJ is unlikely to implement any drastic changes to its existing QT framework.
Instead, the focus will be on a measured deceleration of bond reductions from the next fiscal year onwards. This cautious stance is designed to preempt market upheaval, particularly after government long-term bond yields witnessed a notable surge last month.
Under its current plan, the Bank of Japan has been gradually cutting bond purchases by approximately 400 billion yen per quarter, with an aim to halve its monthly buying to 3 trillion yen by March 2026.
Should the BoJ opt for a 200 billion yen per quarter reduction from fiscal year 2026, monthly purchases would consequently fall to around 2 trillion yen by the close of that fiscal year in March 2027.
BoJ Signals Continued Rate Hikes
Meanwhile, BoJ Governor Kazuo Ueda is anticipated to signal the central bank's ongoing readiness for further interest rate increases.
This prospective tightening factors in the potential risks posed by US tariffs, balanced against persistent domestic food inflation.
In a speech on 3rd June, Ueda reaffirmed the Japanese economy's resilience against the impact of higher US import duties, acknowledging that their effects on Japan could be more substantial than initially forecast.
The BoJ's policy direction is currently at a critical juncture. Rising US tariffs are affecting Japan's export-dependent economy, a factor that prompted the policy board to lower its growth and inflation forecasts on 1st May.
Additionally, at the two-day monetary policy meeting, concluding today, the BoJ is widely expected to maintain its short-term interest rate at 0.5%.
Nevertheless, a protracted delay in raising rates could leave the central bank ill-equipped to manage burgeoning inflationary pressures, as businesses continue to pass on increased raw material and labour costs to consumers.
