The Bank of Japan is seeking to reduce its presence in the bond market. The scale of the proposed purchase of treasury bonds during routine operations on Monday was lower than on April 24.

This move may put upward pressure on Japanese treasury bond yields, thereby narrowing the huge spread between Japan and the US, which is unfavorable to the yen exchange rate. After the Bank of Japan announced this news, the yield on the benchmark 10-year Japanese bond immediately rose, and the yen recovered its earlier losses. The yield on 30-year Japanese bonds also hit the highest level of 2.03% since 2011 at the end of the session.

The Bank of Japan said it will buy 425 billion yen (2.7 billion US dollars) of 5-10 year treasury bonds, compared to 475.5 billion yen last month. The latest purchase volume is still within the planned range for the current quarter. This is the first time since late December last year that the Bank of Japan has cut back on purchases.

“The Bank of Japan's cuts in purchases are surprising; this may help boost yields,” said Takahiro Otsuka, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities. “It is difficult for the market not to see this move as a response to the recent weakening of the yen, and the bond market may experience more volatility.”

Bank of Japan Governor Ueda Kazuo said in March that the bank's new line is to use short-term interest rates as the main policy tool rather than using bond purchase operations or central bank bond holdings.

A summary of opinions from the Bank of Japan's April policy meeting released last week shows that members of the policy committee are closely monitoring the impact of the depreciation of the yen on inflation and expect that the pace of interest rate hikes may accelerate as a result, which has boosted speculation that the bank will raise interest rates earlier and reduce the scale of debt purchases.

“The Bank of Japan appears to be under pressure from the government” to act in response to the falling yen and the loose financial environment, said Shoki Omori, a strategist at Mizuho Securities in Tokyo. “However, the impact will be limited because investors are prepared for this after the Bank of Japan's April policy meeting summary was released.”

After the news of the decline in debt purchases was announced, the yen, which had previously fallen by 0.1%, recovered losses against the US dollar and remained stable at 155.81; 10-year Japanese bond futures extended their decline. Japan's benchmark 10-year yield rose 4 basis points to 0.94% on Monday, moving towards the 10-year high of 0.97% hit in November last year.