Bank of Japan's Monetary Policy Meeting Unleashes Big Move: Maintains Interest Rates Unchanged, Will Slow Down Balance Sheet Reduction Next Year!

On Tuesday (June 17), the Bank of Japan (BOJ) stated in its latest monetary policy statement that it would maintain the policy interest rate at 0.5% and planned to slow down the pace of reducing bond purchases in the next fiscal year.

In late May, Japanese government bond yields surged to record highs, driven by weak demand from investors for long-term Japanese government bond auctions and high volatility in the global bond market. On May 21, the yield on 30-year Japanese government bonds hit a historic high of 3.2%.

At that time, traders noted that this not only reflected market concerns about the global economic outlook but also concerns about the impact of the BOJ's ongoing plan to reduce bond purchases.

On Tuesday, the BOJ's Policy Board concluded a two-day meeting. During the meeting,policymakers unanimously voted to keep the short-term interest rate unchanged at 0.5% and to reduce bond purchases at a slower pace starting next year. It is evident that the key focus of this meeting was to adjust the pace.

This outcome was also in line with market expectations. Prior to the meeting, Ryutaro Kono, Japan's chief economist at BNP Paribas, pointed out, "The instability in the bond market is not conducive to the implementation of monetary policy. To prudently balance the pace of balance sheet reduction, the BOJ is likely to slow down the pace of reducing bond purchases starting from next spring."

Slowing down the pace of balance sheet reduction

In March last year, the BOJ abolished its negative interest rate and yield curve control policies, and then decided in July of the same year to reduce the scale of bond purchases, which would continue until March 2026.

Specifically, the BOJ will continue to reduce its monthly government bond purchase plan and decrease the scale of quarterly bond purchases by approximately 400 billion yen (approximately $2.8 billion) until March 2026.

On Tuesday, the BOJ stated thatit would not make any changes to the existing reduction plan. It is estimated that, as of the quarter ending June 2026, the BOJ's monthly bond purchases will amount to 4.1 trillion yen.

However,according to the BOJ's plan for the next fiscal year, the bank indicated that it would slow down the reduction pace to 200 billion yen (approximately $1.4 billion) per quarter starting from April 2026, with the goal of reaching a monthly purchase level of 2.1 trillion yen by March 2027.

The BOJ explained that this move aims to "improve the functioning of the Japanese bond market in a manner that supports market stability."

On Tuesday, BOJ Governor Kazuo Ueda held a press conference after the meeting, stating that the bank would appropriately reduce bond purchases in a predictable manner and would respond flexibly if yields rise significantly. Regarding the matter of interest rate hikes, Ueda noted that if the economic outlook aligns with expectations, the central bank will raise interest rates.

Investment Bank Perspectives

HSBC Global Research pointed out that a monthly bond purchase scale of 2 trillion yen represents a "natural" level, stating that this would be roughly equivalent to the amount of Japanese government bonds (JGBs) the Bank of Japan (BOJ) purchased monthly before introducing its ultra-loose monetary policy in April 2013.

Benjamin Shatil, a senior economist at JPMorgan Chase in Tokyo, said, "As the BOJ moves further away from the market and begins to end the liquidity expansion that has lasted for over a decade, the bank is walking a fine line in trying to contain volatility."

Shatil added that the BOJ's gradual exit from its ultra-loose monetary policy not only has implications for Japan but also for the global bond market. "The market's focus is increasingly shifting from the BOJ's policy rate normalization path to the pace of its balance sheet reduction," he said.

Krishna Bhimavarapu, an Asia-Pacific economist at State Street Global Advisors, believes that the BOJ will not make any changes to its existing tapering plan before the first quarter of next year, marking a small victory for the BOJ "as the market does not seem to need immediate help to cope with the recent surge in long-term JGB yields."

Following the BOJ's latest statement at noon, the Nikkei 225 index rose 0.55%, the yen strengthened 0.13% against the US dollar to 144.55, and the 10-year JGB yield climbed 3 basis points to 1.491%.