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The Bank of Japan said it would move more slowly by cutting bond purchases as the governor warned that too fast could clash with the stability of one of the world’s largest debt markets.
The central bank is trying to separate the Japanese economy from the huge stimulus program, which has made BOJ owners about half of its Japanese government bonds, significantly reducing market liquidity.
Governor Midorida said at a press conference Tuesday that BOJ will continue to slow down the speed of purchasing bonds.
“It is desirable to continue tapering to move yields more freely, reflecting the power of the market. However, too fast can have an unintended impact on market stability,” Ueda said.
The BOJ also said it would take a “light response” to the rapid rise in long-term interest rates as the Policy Committee concluded a two-day meeting in a unanimous vote to hold short-term interest rates at 0.5%.
The bank has been trying to reassure investors last month after market turmoil. This has resulted in high yields due to long-standing investor demand at JGBS auctions, along with high volatility in the global debt market. Bond yields move inversely to the price.
Traders at the time said the move not only reflected growing concerns about the global economic outlook, but also the impact of BOJ’s plans to tapered bond purchases. The very long-term JGB market has been affected by a significant decline in demand from life insurance companies and other domestic investors.
JGB yields on Tuesday after the announcement rose 0.04 percentage points to 1.48% in 2010, and yields at 0.01% despite a two-year bond gain of 0.76%. JGB yields rose 0.02 percentage points to 2.91% in 2010.
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The bank said it would not make any changes to its current tapering schedule, which is scheduled to run until March 2026. The plan is to cut monthly bond purchases by 4.1TN ($28.3 billion) by 400 million yen every three months.
However, starting in April 2026, BOJ said on Tuesday it would cut just 20 billion yen in planned purchases every three months, with the aim of reaching monthly purchase levels by March 2027.
Benjamin Chatil, senior economist at JPMorgan in Tokyo, said Boji has been walking a nuanced line in trying to contain volatility as he has moved from the market and set out to unwind more than a decade of liquidity expansion.
Shatil added that the gradual retirement of BOJ’s experiments in ultra-loose monetary policy had an impact on the debt markets not only in Japan but also around the world. “The market focus is increasingly shifting from the normalisation pathway of the BOJ policy rate to a multi-year balance sheet overview,” he said.
Economists noted that despite slowing the pace of exits from the JGB market, central banks are still on course for significant reductions in their balance sheet.
Total amount, BOJ will buy more JGBs than was expected a year ago, but once redemption or maturity of bonds on its balance sheet is taken into account, the central bank’s total holdings will continue to be contracted and contracted at a not-slow rate.
BOJ’s own estimates that total bond holdings will decrease by approximately 17% from before taper began in June 2024 to March 2027.
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Analysts said that between June and July, monthly purchase reductions will be reduced to 3.7TN to 3.7TN between June and July.
Monthly purchases of JGB dated over 25 years remain the same. Analysts say it is a signal of BOJ’s determination to maintain stability in an ultra-long mature market.
The interest rate decision was in line with almost every analyst’s expectations, some of which hoped that the BOJ would delay its rate normalization plan, and predicted interest rates would rise until next year.
In a statement released after the meeting, the BOJ repeatedly reiterated its previous warnings, saying it is “very uncertain” about how global trade and other policies will evolve, and how those measures will affect economic activity and prices.
Additional Reports by William Sandland of Hong Kong
