Bank of Japan Considers Slower Bond Purchase Tapering to 200 Billion Yen Per Quarter

The Bank of Japan (BOJ) is contemplating a reduction in the pace of its government bond purchases, a move that could signal a shift in its monetary policy strategy. The central bank has been gradually tapering its bond-buying program, reducing purchases by 400 billion yen every quarter since last summer. However, the BOJ's policy board is now considering slowing this reduction to 200 billion yen per quarter. This potential change comes as the BOJ aims to balance the need to shrink its balance sheet with the goal of preventing long-term market interest rates from rising too quickly, which could undermine economic activity.

The BOJ's decision to slow the pace of tapering is part of a broader strategy to manage the yield curve and ensure financial stability. The central bank, which owns a significant portion of Japanese government bonds (JGBs), has been gradually exiting its massive asset-buying scheme. The BOJ is expected to maintain its benchmark interest rate at 0.5% as it focuses on the impacts of trade negotiations and tariffs, particularly those imposed by the United States. The central bank's policy normalization process, which began in March 2024, involves gradually lifting interest rates from a range of zero to slightly negative.

The BOJ's policy board is likely to maintain the current pace of asset purchases by 400 billion yen a quarter for the fiscal year ending in March 2026. However, there is a growing expectation that the bank will moderate the reduction pace in fiscal 2026, potentially to 200 billion yen per quarter. This adjustment would help strike a balance between reducing the central bank's debt holdings and preventing long-term market interest rates from rising too rapidly, which could negatively impact economic activity.

The BOJ's decision to consider slowing the pace of tapering its bond purchases reflects its cautious approach to monetary policy. The central bank is mindful of the potential risks posed by trade conflicts and geopolitical uncertainties, which could impact economic growth and inflation. By adjusting the pace of its bond purchases, the BOJ aims to ensure that its monetary policy remains flexible and responsive to changing economic conditions. This approach is consistent with the central bank's goal of achieving price stability and supporting a moderate economic recovery.

Since last summer, the central bank has slowed down the buying of Japanese government bonds by 400 billion yen every three months. This was meant to counteract the effects of quantitative tightening. However, because of the bond market’s volatility, the BOJ’s policy board is planning to discuss slowing down the process by half to 200 billion yen per quarter. The yield on 30-year bonds hit a record high of 3.2% last month. This was due to a buyers’ strike that is still going on among local life insurers. But even though they have since dropped to about 2.9%, many experts still see the BoJ in a tough spot because it has been slowing down its long-term bond-buying program. The board will meet on Monday and Tuesday, and most members are expected to back the tapering slowdown.

Meanwhile, the current plan for buying JGB will stay in place until March of next year. The bank is expected to hold the policy rate steady at 0.5%. The BOJ began unprecedented quantitative easing in 2013 to pump money into the economy with massive JGB purchases. In September 2016, it added yield curve control to its tools. By buying bonds, long-term rates were kept low. In March 2024, the bank moved toward adjusting its policy. It stopped buying bonds as a policy tool and started buying less each month in August of that year. In July 2024, the amount paid for things was 5.7 trillion yen monthly. Beginning in August 2024, the BOJ cut back on buying JGB. In January 2026, it will drop to 2.9 trillion yen. If the cut is made to 200 billion yen every three months starting in April 2026, the amount bought will be about 2.1 trillion yen every month from January 2027.

However, some investors in the market believe that the tapering of bond purchases by the BOJ is contributing to the yield rise. Tapering bond purchases “is now on autopilot, and if there is any hawkish action going forward it is likely to be in policy rate settings,” said an economist. Economists said that one of the most important things to watch for is whether the BoJ makes it clear that it plans to do another interim review in 2026 and whether it expresses its view on the appropriate “terminal” purchase amount of JGBs, or the amount it buys some years in the future. According to economists, price cuts will happen more slowly over the next year until they reach 2 trillion yen monthly. The BOJ still wants to keep interest rates from going up and keep the market from going crazy by continuing to sell off government bonds. On the other hand, bonds purchased by the BOJ in the past reaching maturity are helping reduce its debt holdings. The BOJ owned about 560 trillion yen of government bonds at the end of December. This was 52% of the total amount of outstanding government debt. Because tapering is going so slowly, the BOJ has received criticism that its “holdings are still too large.”