The Bank of Japan's interest rate decision is approaching, and Ueda Kazuo faces a difficult choice. The market is focused on its Bond purchasing plan; will the global bond market encounter another 'black swan'?
The Bank of Japan will consider whether to slow down the pace of Bonds purchase reduction while keeping the benchmark interest rate unchanged, a historic decision that is causing significant tension in the global bond market.
All 53 Analysts surveyed expect the Bank of Japan to maintain its interest rate at 0.5%. The focus is on the updated government bond purchasing plan by the Bank of Japan—about two-thirds of respondents predict that the reduction in scale starting in April will be less than the current quarter.
This is the first time that the Bank of Japan has extended its algo tightening plan into the new fiscal year. The Bank of Japan’s policy committee will use this meeting to communicate its stance on recent yield fluctuations to the market. Last month, when the ultra-long-term Japanese government bond yield reached a historical high, Japan was viewed as the source of turmoil in the global bond market.
After the cancellation of negative interest rates and yield curve control policy in March last year, the central bank reduced its bond purchases in the summer. Central bank data shows that as purchases slowed and bonds matured, the amount of government bonds held by the Bank of Japan decreased by a record 6.2 trillion yen in the first quarter. However, after more than a decade of large-scale monetary easing, the Bank of Japan still holds about half of the outstanding government bonds, forcing traders to closely monitor every move.
Since August last year, the Bank of Japan has been reducing its bond purchases by 400 billion yen each quarter. At this rate, by the first quarter of 2026, the monthly purchase volume will be reduced to half of approximately 6 trillion yen before the algo tightening.
The key to the June meeting lies in adjusting the pace. Informed sources reveal that policymakers are considering halving the reduction amount to 200 billion yen per quarter.
"Instability in the bond market is detrimental to the implementation of monetary policy," noted Ryutaro Kono, chief economist at BNP Paribas Japan. "To prudently balance the pace of the balance sheet reduction, the Bank of Japan is likely to slow down the pace of bond purchasing reduction starting next spring."
Bloomberg's survey shows that about 40% of Analysts expect the new reduction amount to be 200 billion yen, 25% predict it to be 300 billion yen, and another 20% believe it will remain at 400 billion yen.
Kazuo Ueda has previously stated that the threshold for the Bank of Japan to intervene in the bond market is very high, as it is repairing the market function damage caused by past Algo and yield curve control. Meanwhile, the Ministry of Finance hinted at a possible cut in super long-term Bond issuance in this fiscal year—discussions with market participants will take place later this week.
After the Bank of Japan announces its policy statement, market attention will shift to Kazuo Ueda's press conference in the afternoon, as investors attempt to capture clues for the next interest rate hike.
The governor emphasized the need to closely monitor the progress of global trade negotiations and their economic impact, believing that there is 'extremely high' uncertainty in the outlook. His cautious statements have cooled market expectations for a recent interest rate hike. Bloomberg's survey shows that Analysts now commonly expect the next interest rate hike to most likely occur in January next year (about one-third of economists hold this view), while the probability of a hike in July has sharply dropped to 8%, and the probability for October remains around 30%.
This meeting coincides with the G7 summit, where Japanese Prime Minister Shigeru Ishiba is expected to meet with Trump in the Canadian Rockies. Traders are closely watching the progress of trade agreements that may reduce uncertainty in Japan's economic outlook.
In an effort to increase support rates ahead of the possible Senate election next month, Shigeru Ishiba is trying to win public opinion by lowering living costs. With the Bank of Japan's policy rates being far lower than those of other countries, Japanese consumer inflation continues to rank first among the G7.
In this month's semi-annual Exchange Rates report, the U.S. Treasury Department unusually mentioned the Bank of Japan's policy, stating that it should continue to tighten its policies to correct the weakness of the yen and balance bilateral trade.
Former Bank of Japan official Tetsuya Inoue, who once served as Ueda's secretary, pointed out: 'The Bank of Japan must maintain a posture to address rising core inflation, which is necessary not only to alleviate public discontent with living costs but also serves as a key bargaining chip in Japan-U.S. trade negotiations.'
Editor/melody
