Japan’s Central Bank on Tuesday announced a measured approach to slowing its government bond purchase reductions while maintaining its benchmark interest rate at 0.5%, as rising growth risks weigh on the economy.
The Bank of Japan (BOJ) confirmed it would continue reducing monthly Japanese government bond (JGB) purchases by around 400 billion yen ($2.76 billion) per quarter through March 2026. However, it plans to moderate the pace of cuts to 200 billion yen per quarter from April 2026 through March 2027, eventually targeting a monthly purchase level of 2 trillion yen.
This policy update aligns with the BOJ’s strategy to enhance the “functioning of the JGB markets in a manner that supports stability in the markets,” the bank said in its statement. An interim review of the plan will take place at the June 2026 monetary policy meeting.
Markets React Positively to BOJ’s Steady Approach
Following the BOJ’s announcement, the Nikkei 225 index rose 0.55%, while the yen strengthened by 0.13% to 144.55 per dollar. Meanwhile, the 10-year JGB yield climbed three basis points to 1.491%.
HSBC Global Research recently noted that a 2 trillion yen monthly purchase level is a “natural” rate, comparable to pre-2013 levels before Japan adopted ultra-loose monetary policy.
Krishna Bhimavarapu, APAC economist at State Street Global Advisors, remarked that the BOJ’s plan to delay the slowdown in JGB purchases until next year represents a small win for the central bank, adding: “Markets do not seem to need immediate help in managing the recent surge in yields on the long end.”
Yields on 30-year JGBs had spiked to multi-decade highs of 3.2% in late May but have since eased to around 2.93%.
Inflation and Growth Risks Cloud Outlook
Despite adjusting its bond-buying strategy, the BOJ reaffirmed its commitment to future rate hikes once underlying inflation stabilizes around the 2% target. BOJ Governor Kazuo Ueda recently told Japan’s parliament that rate increases would proceed “once we have more conviction” on inflation trends.
Japan’s economy faces growing uncertainty. The BOJ warned that slowing global trade and weakening corporate profits would likely dampen growth. The nation’s GDP contracted by 0.2% in the first quarter of 2025, marking the first quarterly decline in a year.
At the same time, inflation remains stubbornly high, driven in part by a sharp rise in rice prices amid a nationwide shortage. The headline inflation rate hit 3.6% in April, extending a three-year stretch above the BOJ’s 2% target.
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While accommodative financial conditions are expected to cushion some of the economic strain, Japan’s path forward remains delicate as policymakers balance inflation control with growth support.
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