The Bank of Japan is weighing whether to hold its current bond-buying pace into the period after the next fiscal year, according to multiple people familiar with the matter, potentially pausing a taper that would be a notable inflection in its quantitative tightening strategy. The central bank is scheduled to review its bond taper plan, which runs through March of the next fiscal year, at its June 15 to 16 meeting and to outline a new path for fiscal 2027 and beyond.
Market participants are watching closely for guidance on whether the BOJ will continue to wind down monthly bond purchases beyond fiscal 2027 or instead keep buying at about 2.1 trillion yen per month. Officials currently have no plan to change the taper that is in place through March next year, but the longer horizon remains uncertain.
Four sources familiar with the BOJ's internal discussions said the bank has been leaning toward pausing further reductions in its monthly purchases. The sources spoke on the condition of anonymity because they were not authorised to comment publicly. One of the sources stated, "The BOJ can afford to pause its taper as its holdings will fall significantly just with the runoff of maturing bonds." That view was reported to be shared by three other people briefed on policy deliberations.
Those advocating a pause note that substantial declines in the BOJ's bond holdings can occur through scheduled maturities without additional cuts to the purchase program. Under the current QT framework the BOJ trims monthly buying by 200 billion yen each quarter, a mechanical step that has been in place as the bank works to reduce a balance sheet expanded during decades of very low interest rates.
The BOJ's holdings of Japanese government bonds stand at roughly 530 trillion yen. By virtue of that size, the central bank currently owns about 49% of all JGBs available in the market, a market share that makes its actions highly consequential for yields and the cost of funding Japan's debt. Even if purchases are held steady, the natural runoff of maturing JGBs could lower the BOJ's holdings by as much as 50 trillion yen per year, and holdings have already fallen nearly 20% from their peak in late 2023.
Officials are also expected to act on short-term interest rates at the June meeting. The BOJ is widely expected to raise its short-term policy rate to 1.0% from the current 0.75% as part of its ongoing monetary policy normalization.
Within the nine-member policy board, positions on the pace and sequencing of QT are divided. Some members prioritise calming investor concerns and avoiding abrupt market moves, while others emphasize the need to steadily reduce the central bank's balance sheet.
Board member Hajime Takata, who previously worked as a bond strategist, warned in February that sharply lower BOJ buying could strain a market already wrestling with abundant supply. At the other end of the spectrum, Naoki Tamura, a former banker and a current board member, dissented from June's earlier decision to reduce purchases by 200 billion yen per quarter for fiscal 2026. Tamura argued for a steeper cut of 400 billion yen instead.
Another board member, Junko Koeda, commented in a speech earlier this month that the BOJ should "proceed steadily" with the normalization of its balance sheet, adding that its very large bond holdings are an "essential factor" in that process.
Officials have signalled that the QT plan aims to reduce the BOJ's direct influence over yields while avoiding excessive volatility in a market that may struggle to supply enough private-sector buyers to replace the central bank. Governor Kazuo Ueda has overseen the reduction in bond holdings since 2024 as part of broader efforts to return policy to more normal settings after many years of ultra-low rates.
Whether the BOJ formalizes a pause by abandoning its prior practice of publishing an annual taper plan and instead adopting an open-ended commitment to buy at the current pace, or whether it opts to continue methodical purchase reductions, remains a point of contention among board members. The vote at the June 15-16 meeting could be narrowly decided given the split views on the policy panel.
For markets and financial institutions, the BOJ's posture on tapering influences bond yields and funding costs, while the degree of any continued purchase program will affect the availability of JGBs in the secondary market. The central bank's approach to QT will therefore have implications across the government bond market, banking sector balance sheets, and the broader cost of debt financing in Japan.
Clear summary
The BOJ is considering pausing further reductions in its monthly government bond purchases beyond the next fiscal year and may instead maintain the current pace of approximately 2.1 trillion yen per month. The decision is expected to be contested within the nine-member board. The bank will review its taper plan at its June 15-16 meeting and is likely to lift its short-term policy rate to 1.0% from 0.75%.
Key points
- Policy review: The BOJ will reassess its taper plan at the June 15-16 meeting and set policy for fiscal 2027 and beyond.
- Balance sheet mechanics: Holdings are about 530 trillion yen, the BOJ owns roughly 49% of JGBs, and runoff of maturing bonds could reduce holdings by up to 50 trillion yen annually.
- Board split: Some members favour market stability and a possible taper pause while others urge steady balance sheet reduction; an interest rate rise to 1.0% is expected.
Risks and uncertainties
- Policy division risk: A split vote among the nine board members could produce a closely decided outcome, increasing uncertainty about the BOJ's QT path. This affects bond markets and banks.
- Market stability risk: Reducing purchases too quickly could strain a market already facing heavy supply, risking sharper yield volatility that would affect government funding costs and the broader financial sector.
- Implementation uncertainty: Whether the BOJ adopts an open-ended purchase commitment at 2.1 trillion yen per month or continues scheduled quarterly reductions remains unclear, creating uncertainty for investors in JGBs and fixed income markets.