The Bank of Japan kept its interest rates steady on Tuesday and said it would slow the pace of reduction in its bond purchases next year, signalling a cautious approach to unwinding its decade-long monetary stimulus.
As widely expected, the central bank maintained short-term interest rates at 0.5 per cent by a unanimous vote at the two-day policy meeting that ended on Tuesday.
The decision comes amid escalating Middle East tensions and new U.S. tariffs, complicating the BOJ’s efforts to raise still-low interest rates and shrink a balance sheet now roughly the size of Japan’s economy.
QUOTES
NORIHIRO YAMAGUCHI, SENIOR JAPAN ECONOMIST, OXFORD ECONOMICS, TOKYO:
“The Bank of Japan’s decision to slow the pace of QT in FY2026 is an attempt to placate nervous bond markets following a recent spike in ultra-long JGB yields. It appears that the bank is prioritizing market stability during the process of normalizing its balance sheet. It could potentially harm the real economy and the government’s finances if it spreads to shorter-term yields.
“QE is likely to continue to be an essential policy tool, given that the JGB market could become more fragile amid heightened fiscal concerns and changes in the market structure.”
