According to informed sources, the Bank of Japan will consider maintaining its current pace of government bond purchases unchanged beyond the next fiscal year, thereby pausing its bond-buying tapering process.
Zhitong Finance APP has learned from informed sources that the Bank of Japan (BOJ) is considering maintaining its current government bond purchase scale unchanged beyond the next fiscal year, effectively pausing its quantitative tightening (QT) process. This move would mark a significant turning point in its QT program.
At its policy meeting scheduled for June 15–16, the BOJ will review its current bond-buying tapering plan—which runs through March of next year—and unveil a new plan covering fiscal year 2027 and beyond. While markets widely expect no changes to the existing tapering schedule, investor attention is now focused on whether the BOJ will continue reducing its monthly bond purchases after FY2027 or maintain the current pace of approximately JPY 2.1 trillion (about USD 13 billion) per month.
Four sources indicated that, given the progress already made in shrinking its massive balance sheet, the BOJ is inclined to halt further reductions in bond purchases. One source stated, “Even if it stops further tapering, the BOJ’s bond holdings will still decline significantly due solely to maturing bonds rolling off naturally.” The other three sources echoed this view, adding that the BOJ may discontinue its practice of setting annual tapering targets and instead adopt an open-ended arrangement, committing to maintain monthly purchases at JPY 2.1 trillion.
Beyond its QT decision, the market also broadly expects the BOJ to raise its policy rate from 0.75% to 1% at next week’s meeting. With markets already pricing in a nearly 90% probability of a June rate hike by the BOJ, investors are now more focused on whether rising inflationary pressures stemming from potential U.S.-Israeli military action against Iran could prompt the BOJ to accelerate future rate hikes.
Two sources noted that although Japan’s financial conditions remain accommodative, the BOJ currently sees no need to accelerate or implement consecutive rate hikes, as the economic impact of the Middle East conflict remains highly uncertain.
Internal Divisions
However, sources indicated that the decision to pause bond purchase tapering could be closely contested, as divisions exist within the BOJ’s nine-member Policy Board. Some members prioritize calming investor sentiment, while others argue for steadily continuing bond purchase reductions to shrink the BOJ’s bloated balance sheet.
Under Governor Kazuo Ueda, the BOJ has been gradually reducing its bond holdings since 2024 as part of its broader effort to end decades of ultra-low interest rates and normalize monetary policy. Currently, it reduces its monthly bond purchases by JPY 200 billion each quarter.
The BOJ still holds 49% of all outstanding Japanese government bonds (JGBs), meaning any policy adjustment it makes will significantly affect bond yields and financing costs across Japan’s vast debt system. Regardless of whether it continues tapering, its bond holdings are expected to decline by up to JPY 50 trillion annually due to natural runoff from maturing bonds. In fact, its bond holdings have already fallen by nearly 20% since peaking at the end of 2023.
The BOJ has previously stated that its QT program aims to reduce its control over yields while avoiding excessive volatility in the bond market. However, as the BOJ gradually withdraws from the market, risks of insufficient buyer demand are emerging, necessitating cautious policy implementation.
Last week, Kazuo Ueda stated that the Bank of Japan must focus on maintaining bond market stability, indicating its priority remains preventing sharp fluctuations in yields. Hajime Takata, a BOJ board member and former bond strategist, warned in February this year that the central bank’s reduction in bond purchases could exert pressure on an already oversupplied bond market.
However, pausing the tapering of bond purchases is not a foregone conclusion, as some board members have indicated their preference for steadily advancing the Bank of Japan’s balance sheet normalization. This includes policy board member Naoki Tamura, a former banker, who voted against the BOJ’s June 2023 decision to reduce quarterly bond purchases by JPY 200 billion starting in fiscal year 2026, advocating instead for a JPY 400 billion quarterly reduction. Earlier this month, policy board member Junko Koeda stated in a speech that the BOJ should 'steadily advance' balance sheet normalization, with its large bond holdings being a 'key factor' driving this process.
Political Resistance
Moreover, political resistance to the Bank of Japan’s quantitative tightening is expected to intensify under a government led by Sanae Takaichi, which advocates tax cuts and increased spending funded through additional bond issuance. Japanese government bonds (JGBs) previously faced a sell-off as market sentiment was dampened by concerns over inflation, expectations of higher interest rates, and fears that the Japanese government would expand fiscal spending to support the economy. The yield on Japan’s benchmark 10-year government bond has risen from around 0.7%—the level when the BOJ began hiking rates—to approximately 2.67% currently.
Akira Otani, Managing Director at Goldman Sachs Japan and former senior economist at the Bank of Japan, noted: 'Inflation risks stemming from the situation in the Middle East, combined with the Japanese government’s proactive fiscal stance, are jointly pushing up bond yields. Further reductions in bond purchases could drive yields even higher, potentially triggering political friction.'
Former BOJ official Nobuyasu Atago remarked: 'We are witnessing a remarkably rapid rise in JGB yields, making it difficult for investors to buy bonds, and the Ministry of Finance may be growing concerned as well. Given the political headwinds, the Bank of Japan has no reason to continue balance sheet normalization in the next fiscal year.' He added bluntly that what the Japanese government least wants to see is rising JGB yields. If the 10-year JGB yield breaches 3%, the government’s debt servicing costs would swell further, squeezing an already constrained fiscal space even tighter.
Editor/Deng