The Bank of Japan (BOJ) announced on Tuesday it will slow the pace of its government bond purchase reductions starting next fiscal year. The central bank kept its short-term interest rate steady at 0.5% during its two-day policy meeting, signaling a cautious approach to unwinding its decade-long stimulus program.
BOJ Governor Kazuo Ueda highlighted the high uncertainty in global trade policies, especially due to escalating conflicts in the Middle East and ongoing U.S. tariffs. These factors pose downside risks to Japan’s economy and inflation outlook, prompting the BOJ to moderate its balance sheet reduction to avoid market disruption.
Currently, the BOJ reduces its government bond purchases by 400 billion yen ($2.76 billion) each quarter, aiming to lower monthly buying to about 3 trillion yen by March 2026. Starting in fiscal 2026, the tapering pace will slow to 200 billion yen quarterly, reducing monthly purchases to approximately 2 trillion yen by March 2027. This change reflects feedback from market participants concerned about recent spikes in long-term bond yields.
The decision drew some dissent from board member Naoki Tamura, who preferred maintaining the current tapering speed. Despite this, the BOJ emphasized it will monitor long-term interest rates closely and respond swiftly if yields rise too quickly, including increasing bond purchases if needed.
Japan’s inflation remains above the BOJ’s 2% target, with core inflation hitting 3.5% in April, driven by rising food prices and labor shortages. However, the BOJ is balancing inflation pressures with risks from external factors like U.S. tariffs, which have hurt Japan’s export-driven economy. Recent trade talks between Japanese Prime Minister Shigeru Ishiba and U.S. President Donald Trump made progress but did not resolve tariff issues.
The BOJ’s cautious stance reflects its effort to normalize policy without causing market turmoil, amid complex global and domestic challenges. The central bank will review its tapering program again in June next year to adjust its approach as needed.
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