[TOKYO] The Bank of Japan (BOJ) is set to consider whether to taper its bond purchases at a slower pace while also leaving its benchmark interest rate unchanged, in a decision that will be closely scrutinised by the bond market.
All 53 BOJ watchers surveyed expect no change in the BOJ’s 0.5 per cent interest rate at the two-day gathering concluding on Tuesday (Jun 17). The spotlight will instead fall on the BOJ’s updated plan to curtail its purchases of government bonds as it seeks to shrink its footprint in the market. About two-thirds of respondents expect the cutbacks will be smaller from April compared with the current pace.
The meeting will carry implications for the global bond market, with governor Kazuo Ueda’s board signalling its views on recent yield volatility when it extends its quantitative tightening plan into the next fiscal year for the first time. Japan was seen as a source of global debt market jitters when yields on super long JGBs hit a record high last month.
The central bank began tapering bond buying last summer after scrapping its negative interest rate and yield curve control (YCC) programme in March of that year. The BOJ’s holdings of government bonds decreased by a record 6.2 trillion yen (S$55 billion) in the first quarter as purchases slowed and debt matured, according to central bank data.
Even so, after more than a decade of conducting a massive monetary easing campaign, the BOJ still holds roughly half of all outstanding government bonds, compelling traders to scour every action it takes.
Since last August, the BOJ has reduced its bond purchases by 400 billion yen every quarter. Under that plan, monthly purchases would be almost halved by the first quarter of 2026 compared with the roughly six trillion yen before QT began.
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A key focus of the June meeting will be the tempo beyond March. BOJ officials are likely to consider slowing the pullback to about half the previous pace, meaning a 200 billion yen reduction in buying each quarter, as among their options, sources familiar with the matter told Bloomberg earlier this month.
“The destabilisation of the bond market isn’t desirable for the conduct of monetary policy,” said Ryutaro Kono, chief Japan economist at BNP Paribas. “To carefully determine the appropriate pace of shrinking its balance sheet, the BOJ is likely to ease the pace in the reduction of bond purchases from next spring.”
Around 40 per cent of analysts expect the new pace of cutbacks to be about 200 billion yen, while a quarter of them puts the figure at 300 billion yen and another fifth forecasts the pace will be kept at around 400 billion yen, according to a Bloomberg poll.
Ueda has indicated there’s a high hurdle for the central bank to consider intervening in the bond market as it tries to restore the functioning of the market that was damaged by its past quantitative easing and YCC programmes. At the same time, the Ministry of Finance has signalled it might consider cutting back the issuance of super long bonds this fiscal year ahead of a meeting with market participants later this week.
Japan’s 30-year bond yields touched a record high of 3.185 per cent, while that of 40-year debt hit 3.675 per cent, also a high, in a reflection of mismatched supply and demand in the market. A measure of demand for a 20-year bond sale registered the weakest since 1987.
Once the BOJ reveals its bond buying plan together with a policy statement around noon, the focus will turn to Ueda’s press conference as investors seek hints on the likely timing for the next rate hike. That event typically starts at 3.30 pm in Tokyo.
The governor has stressed the need to monitor trade talk developments around the world as well as their economic implications as he sees “extremely” high uncertainties ahead. His hint of caution has helped push back expectations for a near-term rate hike among BOJ watchers.
In a Bloomberg survey, January is now seen as the most likely timing for the next increase, with around one-third of economists predicting it. Expectations for July plunged to 8 per cent, while for those saying October held up at around 30 per cent.
Prime Minister Shigeru Ishiba is expected to meet President Donald Trump on the sidelines of the Group of Seven (G7) summit currently underway in the Canadian Rockies, with traders watching for a trade deal – or progress towards a deal – that would reduce the degree of uncertainty over Japan’s economic outlook.
Ishiba is trying to shore up his support ratings by lowering the cost of living ahead of an upper house election likely to be held next month. Consumer inflation in Japan has stayed at the highest pace among G7 countries as the BOJ’s policy rate remains much lower than the benchmark rates of its peers.
The US Treasury Department made a rare statement related to BOJ policy in its semi-annual currency report this month, saying the bank should continue with policy tightening as a means to correct the weak yen and rebalance bilateral trade.
“It’s important for the BOJ to keep its stance to respond to a rise in underlying inflation not only for public discontent over the cost of living but also for trade talks with the US,” said Tetsuya Inoue, a former BOJ official who was once a secretary of Ueda’s when he was a board member. BLOOMBERG
