Bank of Japan Holds Steady for Three Straight Meetings, Slows Down Bond Taper from Q2 Next Year

TradingKey - On June 17, the Bank of Japan announced that it would keep its policy interest rate unchanged at 0.5%, a decision that aligns with prevailing market expectations.

Since March 2025, the Bank of Japan has maintained its position across three consecutive meetings without adjusting interest rates. Earlier reports indicated that, although domestic inflation in Japan has performed stronger than anticipated, the Bank believes it needs to wait for clearer economic signals before considering a rate hike.

In terms of its bond purchasing plan, the Bank of Japan responded as expected due to market turbulence caused by surging yields on Japanese government bonds amid insufficient buyer demand.

The Bank announced that starting in April 2026, it will halve the reductions in its quarterly bond purchases from the current ¥400 billion to ¥200  billion (approximately $14 billion). By the first quarter of 2027, monthly bond purchases are expected to fall to around ¥2 trillion. This reflects the gradual exit from the ultra-loose monetary policy framework initiated in 2013.

The adjustment plan was passed with an 8-1 voting result, with the sole dissenting vote coming from committee member Naoki Tamura, who advocated for maintaining the original pace of bond purchase reductions and emphasized that "long-term interest rates should be determined by market supply and demand mechanisms."

Following the announcement of this resolution, reactions in foreign exchange markets were relatively muted. The USD/JPY exchange rate showed little short-term volatility, indicating that market participants had fully absorbed expectations regarding policy direction.

The government bond market exhibited divergent trends; yields on both 5-year and 10-year bonds rose by 1.5 basis points each. Market analysts noted this may reflect investors' implicit bets on future normalization policies by the Bank of Japan.

The prevailing belief among market participants is that rising risk aversion due to escalating tensions in the Middle East and the upcoming Federal Reserve interest rate decision are creating complex interlinkages among external policies, which could impact future decisions made by the Bank of Japan.