BOJ's Uncertain QT Plans Boost Super Long-Term Bond Demand

The Bank of Japan's (BOJ) quantitative tightening (QT) end goal remains uncertain, according to a recent analysis. The central bank's June monetary policy meeting did not specify the extent to which it plans to advance QT, indicating a cautious approach towards reducing the purchase of super long-term Japanese government bonds. This uncertainty is likely to provide short-term support to the supply and demand dynamics in the super long-term sector.

The BOJ's governor's comments suggest that Japan is still far from the next interest rate hike, further emphasizing the central bank's deliberate and measured approach to its QT policies. While the BOJ's mid-term review of its bond purchase plan largely aligned with market expectations, it did not provide any specific plans for the period beyond April 2027. This lack of clarity has left the extent of the planned reduction in bond purchases unclear.

Prior to a meeting between the Ministry of Finance and primary dealers, market expectations were that the ministry would adjust its Japanese government bond issuance plan. Although the expected reduction in the supply of super long-term Japanese government bonds largely met market expectations, the analysis suggests that this could have a significant impact on supply and demand dynamics.

The BOJ also released its bond purchase operation schedule for July to September 2025, indicating no reduction in its planned purchases of 10- to 25-year Japanese government bonds, despite a reduction in the previous quarter. This suggests that, at least for now, the BOJ intends to take a cautious approach to reducing its purchases of super long-term bonds, which could provide a slight positive impact on supply and demand dynamics in the super long-term sector.

However, the BOJ did not provide any plans for the period beyond April to June 2027, stating that a decision would be made a year later. The central bank also did not provide any information on the extent to which it plans to reduce its bond purchases. Given that plans for the period beyond April to June 2027 have been put on hold and one policy board member opposed the decision to slow the pace of reduction, the analysis suggests that the market must at least consider the possibility that the reduction will continue beyond April to June 2027. This could result in the final monthly purchase level being significantly lower than 2 trillion yen, potentially having a slight negative impact on bond supply and demand.