BOJ Slows Pace of Bond Purchase Reduction to Show Consideration for JGB Market Stability

Overview

Marubeni Economic Research Institute, Chief Researcher Hirohiro Enomoto July 1, 2025 ## 1. Report Overview This report analyzes the Bank of Japan's decision at its June 16-17, 2025 Monetary Policy Meeting to slow the pace of its government bond purchase reduction. The BOJ decided to halve the monthly pace of long-term JGB purchase reduction from 400 billion yen to 200 billion yen starting from April 2026. This decision emphasizes the balance between ensuring JGB market stability and restoring market function, with Governor Ueda explaining it as "to prevent future interest rate or JGB market instability." ## 2. Key Points - Policy interest rate target (around +0.5%) maintained - From April 2026, monthly JGB purchase reduction pace slowed to 200 billion yen (previously 400 billion yen) - Aiming for monthly purchases of around 2 trillion yen in January-March 2027 - BOJ's JGB holdings expected to decline by approximately 16-17% from June 2024 levels by March 2027 - Intention to enhance market predictability and avoid sudden market fluctuations ## 3. Current State of BOJ's JGB Purchase Policy The JGB purchase amount of 5.7 trillion yen per month as of July 2024 is being reduced through a phased reduction process. Under the current reduction plan: - Until January-March 2026: Continue reduction of 400 billion yen per month - From April 2026: Slow reduction pace to 200 billion yen per month - January-March 2027: Scheduled to reach purchase scale of around 2 trillion yen per month BOJ JGB holdings are expected to decline from 577 trillion yen in June 2024 to 559 trillion yen in June 2025 (YoY -3.1%), down 7-8% YoY by March 2026, and down 16-17% YoY by March 2027. ## 4. Market Reaction and Concerns Immediately after the policy announcement, JGB yields temporarily rose but subsequently showed a general downward trend. As of June 27, 2025, only 30-year and 40-year bonds slightly exceeded pre-announcement levels. Main market concerns: - Declining demand from domestic investors like life insurance companies in the super-long zone - Expansion of financial institutions' risk exposure under prolonged ultra-low interest rate environment - Reduced capacity for private investors to absorb JGBs - Emergence of term premiums ## 5. Monetary Policy Meeting Outlook Governor Ueda explained this decision as "the result of balancing (market) function recovery and stability." Main policy directions: - Avoid surprises and enhance market predictability - Aim to exit from ultra-accommodative monetary environment while avoiding excessive tightening - Prioritize JGB market stability - Purchase schedule from April 2027 onward to be considered and announced at June 2026 meeting ## 6. Specific JGB Purchase Reduction Plan Phased reduction schedule: 1. July 2024 (before reduction): 5.7 trillion yen per month 2. Until March 2026: Reduce by 400 billion yen per month 3. From April 2026: Slow to 200 billion yen monthly reduction 4. January-March 2027: Reach around 2 trillion yen per month This plan, combined with maturity factors of BOJ-held JGBs and relaxed use of "reduction measures related to JGB supplementary supply," is expected to appropriately control the pace of quantitative tightening. ## 7. Market Impact Analysis Impact on JGB market: - Long-term interest rate stabilization: Slower reduction pace suppresses market volatility - Improved supply-demand balance: Better alignment between BOJ purchases and MOF issuance plans - Stabilized investor sentiment: Enhanced predictability facilitates investment planning Impact on financial institutions: - Maintained financial soundness through stable bond prices - Enhanced predictability in risk management - Time secured to respond to new JGB absorption ## 8. International Perspective The BOJ's policy change has aspects running counter to the international financial environment: - Major countries/regions have shifted to rate cuts since late 2024 - BOJ's policy normalization is formally in a tightening direction - Divergence from international easing trends increases market volatility risk Past example: After the July 31, 2024 policy change, combined with poor US employment statistics, foreign exchange and stock prices fluctuated sharply, forcing Deputy Governor Uchida to make market-restraining remarks. The current approach is cautious to avoid such situations. ## 9. Risk Factor Assessment Major risk factors: 1. **Overseas economic slowdown risk from Trump tariffs**: BOJ judges significant downside risks for both economy and prices 2. **US Treasury downgrade risk**: Factor for global bond price instability 3. **Unanchored inflation expectations**: Governor Ueda noted "expected inflation rate not yet anchored at 2%" 4. **Reduced financial institution risk tolerance**: Risk exposure already expanded under prolonged low interest rate environment 5. **Fiscal consistency**: Need to coordinate JGB issuance plans with BOJ purchases ## 10. Conclusion and Future Outlook The BOJ is balancing market stability and function recovery through slowing the pace of JGB purchase reduction. This decision has the following significance: 1. **Market consideration**: Avoiding rapid changes and providing market participants time to adapt 2. **Policy sustainability**: Proceeding with normalization at a manageable pace 3. **International coordination**: Awareness of harmony with global financial environment 4. **Fiscal coordination**: Reducing uncertainty in government issuance plans Future focus points: - Possibility of additional adjustments at June 2026 interim review - Status of inflation expectation anchoring - Response to changes in international financial environment - Long-term interest rate trends and financial institutions' response capacity The BOJ is expected to continue cautious policy management, emphasizing dialogue with markets while proceeding with gradual monetary policy normalization.