Key facts
- The Bank of Japan is considering pausing its reduction of government bond purchases from April 2027.
- The decision on pausing the bond taper is seen as close due to a split on the nine-member board.
- The BOJ will review its bond taper plan at the June 15-16 meeting and lay out a new plan for fiscal 2027 and beyond.
- The central bank is expected to raise its short-term policy rate to 1% from 0.75% at the upcoming meeting.
- The BOJ's bond holdings have already decreased by nearly 20% from their peak in late 2023.
The Bank of Japan is contemplating pausing its reduction of government bond purchases starting in April 2027, a move that would signify a shift in its quantitative tightening (QT) strategy. This potential pause comes as the central bank aims to normalize monetary policy after years of ultra-low interest rates and aims to reduce its substantial balance sheet, which currently holds around 530 trillion yen in Japanese government bonds (JGBs).
The decision is reportedly contentious, with the nine-member board divided between those prioritizing market stability and investor reassurance, and others advocating for a consistent reduction in purchases to shrink the BOJ's balance sheet. The current plan involves trimming monthly bond buying by 200 billion yen each quarter, a process that has already led to a nearly 20% decrease in the BOJ's holdings from its late 2023 peak.
Sources suggest the BOJ could move away from its practice of outlining annual taper plans, opting instead for an open-ended commitment to buy bonds at the current pace of roughly 2.1 trillion yen per month. This approach is supported by the view that maturing bonds will naturally reduce the BOJ's holdings significantly.
In addition to the QT discussion, the BOJ is widely expected to increase its short-term policy rate to 1% from the current 0.75% at its upcoming June 15-16 meeting. This rate hike would be another step in the bank's monetary policy normalization.
Challenges remain, particularly concerning market stability. The BOJ still owns 49% of all JGBs, making its purchasing decisions highly influential on yields and Japan's debt servicing costs. Board members like Hajime Takata have warned that reduced buying could strain the market, while others, such as Naoki Tamura and Junko Koeda, have expressed a preference for a more aggressive or steady approach to balance sheet reduction.