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The Bank of Japan has said it will move more slowly on cutting back its bond purchases as its governor warned that going too quickly could hit the stability of one of the world’s biggest debt markets.
The central bank is attempting to wean the Japanese economy off the huge stimulus programme under which the BoJ became the owner of roughly half the entire stock of Japanese government bonds, significantly reducing market liquidity.
Governor Kazuo Ueda told a press conference on Tuesday that the BoJ would continue to slow the rate at which it buys bonds — a process known as tapering.
“It’s desirable to continue further reducing government bond purchases to allow yields to move more freely under market forces,” Ueda said. “But we think that if the pace of future reductions is too rapid, it could have an unexpected impact on market stability.”
The BoJ also said it would take “nimble responses” to any rapid rise in long-term interest rates, as its policy committee concluded a two-day meeting with a unanimous vote to hold short-term interest rates at 0.5 per cent.
The bank is seeking to reassure investors after market turmoil last month when weak demand at auctions of long-dated JGBs, along with high volatility in global debt markets, sent yields to record highs. Bond yields move inversely to prices.
Traders at the time said the moves reflected growing concerns not only over the global economic outlook but also about the impact of the BoJ’s plans to taper its bond purchases. The market for very long-dated JGBs has been affected by a marked decline in demand from life insurers and other domestic investors.
Yields on JGBs rose on Tuesday following the announcement, with 10-year JGB yields climbing 0.04 percentage points to 1.48 per cent and those for the two-year bond edging up 0.01 percentage points to 0.76 per cent. Yields on the 30-year JGB rose 0.02 percentage points to 2.91 per cent.
The bank said it would not make any changes to the current tapering schedule, which is set to run until March 2026. Under the plan, monthly bond purchases of ¥4.1tn ($28.3bn) are being reduced by ¥400bn every three months.
But beginning in April 2026, the BoJ said on Tuesday, it would reduce its planned purchases by just ¥200bn every three months, with the aim of reaching a monthly purchase level of ¥2.1tn by March 2027.
Benjamin Shatil, senior economist at JPMorgan in Tokyo, said the BoJ was walking a fine line in attempting to contain volatility as it increasingly stepped away from the market and embarked on an unwinding of more than a decade of liquidity expansion.
Shatil added that the BoJ’s gradual retirement of its experiment in ultra-loose monetary policy had implications not just for Japan but for global debt markets. “Market focus is increasingly shifting from the BoJ’s policy rate normalisation path to its multiyear balance sheet rundown,” he said.
Economists pointed out that, despite slowing the pace of its exit from the JGB market, the central bank was still on course for a major reduction in its balance sheet.
In gross terms, the BoJ will be buying more JGBs than it envisaged a year ago but, when redemptions — or maturing bonds on its balance sheet — are factored in, the central bank’s total holdings will continue to contract and at a rate that will not slow.
By the BoJ’s own estimate, its total bond holdings will decline by about 17 per cent by March 2027 from before the tapering started in June 2024.
Analysts noted that the reductions in monthly purchases, from ¥4.1tn to ¥3.7tn between June and July, would focus mostly on lower maturity JGBs of up to 10 years.
Monthly purchases of JGBs dated longer than 25 years will remain the same, in what analysts said was a signal of the BoJ’s determination to maintain stability in the super-long maturity market.
The interest rate decision was in line with the expectations of almost all analysts, some of whom now expect the BoJ to delay its rate normalisation plans, forecasting no rate increases until next year.
In its statement published after the meeting, the BoJ reiterated previous warnings that it remained “extremely uncertain” how global trade and other policies would evolve, and what impact those measures would have on economic activity and prices.
Additional reporting by William Sandlund in Hong Kong