Market calls are getting louder, the Bank of Japan may temporarily suspend reducing bond purchases in the 2027 fiscal year.

The Bank of Japan is scheduled to hold a monetary policy meeting on June 15th and 16th. Currently, market expectations for a rate hike are increasing, and the review of the bond purchase plan is also closely watched. Due to increased volatility in the bond market, many investors believe that the Bank of Japan should pause the tapering of its bond purchase program in the next fiscal year. If the tapering of bond purchases is paused, it will mark a turning point in the Bank of Japan's quantitative tightening (QT) policy. This plan has been implemented since 2024 and is one of the measures taken by Bank of Japan Governor Haruhiko Kuroda after exiting a decade-long large-scale easing stimulus policy. The Bank of Japan will hold a policy meeting on interest rates on June 15th and 16th to evaluate the tapering of the bond purchase plan until March next year and to formulate a new plan for the 2027 fiscal year. The market generally expects that the current tapering of the bond purchase plan will not be adjusted, with the focus shifting to the next fiscal year: whether the Bank of Japan will continue to taper the monthly bond purchases in the 2027 fiscal year or maintain the current pace. Two informed sources said that while a final conclusion has not yet been reached within the Bank of Japan, the ongoing uncertainty in the bond market and the turbulence in the Middle East have gradually made pausing the tapering of the bond purchase program the preferred option. One of the sources, when discussing the tapering of the bond purchase program, said: "The market is still volatile, and there is no need to rush into action." He also added that most market participants are inclined to maintain the current bond purchase size. Political factors are also prompting the Bank of Japan to consider pausing the tapering of the bond purchase program. Rising Japanese bond yields are increasingly constraining the spending plans of the Suga administration. One source said, "The last thing the Japanese government wants to see is an increase in bond yields." Calls to pause the tapering of the bond purchase program are growing A survey by the Bank of Japan shows that some investors are already calling for the Bank of Japan to pause the tapering of the bond purchase program, highlighting the practical challenges faced by the Bank of Japan in reducing its holdings of Japanese government bonds. Earlier signs indicated that due to market uncertainties, the Bank of Japan may consider slowing down the tapering of the bond purchase program. The Bank of Japan will release minutes of its discussions with bond market participants on May 21st and 22nd next week, providing further clarity on the direction of the tapering of the bond purchase program. Former Bank of Japan official Nobuyasu Ataka said, "With bond yields rising sharply, it is becoming difficult for investors to buy bonds. The Japanese Ministry of Finance may also be starting to feel concerned." He said, "Given the current political headwinds, I do not see any reason why the Bank of Japan should continue to taper its bond purchases in the next fiscal year." Former Bank of Japan board member Sayuri Sakurai also suggested on Friday that given the recent volatility in the bond market and the progress the Bank of Japan has made in reducing its balance sheet, it may be possible to stop tapering the bond purchases next year. Last week, due to concerns about Japan's deteriorating fiscal situation and rising inflation, the yield on 10-year Japanese government bonds rose to 2.8%, hitting a 30-year high and approaching the Ministry of Finance's target of 3% set during the drafting of the 2026 fiscal year budget. If the yield exceeds 3%, it will increase debt servicing costs and reduce space for other expenditures. The Bank of Japan's decision to raise interest rates may also affect its tapering of the bond purchase program. Currently, the market generally expects the Bank of Japan to raise its benchmark interest rate from 0.75% to 1% at its June meeting. Analysts believe that while the Bank of Japan's stance on tapering bond purchases and monetary policy may be independent of each other, if a rate hike occurs in June, the rationale for slowing down the tapering of bond purchases will be even stronger. Mariko Iwashita, Rate Strategist at Nomura Securities, said, "Given the instability of the bond market, the Bank of Japan is likely to proceed cautiously to avoid unnecessary market turmoil." She expects the Bank of Japan to pause the tapering of bond purchases in the 2027 fiscal year. She said, "Pausing the tapering of bond purchases combined with a rate hike would be a good strategy," as the former would ease upward pressure on yields while the latter would address concerns about policy lagging behind the situation. Political resistance highlighted For years, major central banks have stimulated their economies by purchasing large amounts of bonds, leading to a sharp expansion of their balance sheet sizes. Now, as debt levels rise and yield fluctuations intensify, major central banks are facing significant challenges in reducing their balance sheets. In the United States, as the appeal of U.S. Treasuries declines, there are also doubts within the industry about the prospects for new Fed Chairman Kevin Warsh to advance the tapering plan. Since launching its quantitative tightening in 2024, the Bank of Japan has maintained a cautious approach and gradually reduced its bond purchases, currently lowering the monthly bond purchase size by 200 billion yen per quarter. With the Suga administration advocating tax cuts and increased spending, relying on issuing bonds to raise funds, the political resistance to the Bank of Japan's quantitative tightening is growing. Even if the Bank of Japan does not gradually reduce the size of its bond purchases, its holdings of government bonds worth around 500 trillion yen will continue to decline steadily as redemptions have reduced its balance sheet since its peak at the end of 2023 by 20%. Aki Ohtani, Managing Director at Goldman Sachs Japan and former senior economist at the Bank of Japan, believes that given the current situation, the Bank of Japan should maintain its current pace of bond purchases. He pointed out, "The inflation risks brought about by the situation in the Middle East, combined with the aggressive fiscal policy of the Japanese government, are pushing up bond yields. Further reducing bond purchases could push up yields and trigger political friction."