BoJ taper debate heats up as rising yields complicate exit strategy

The Bank of Japan’s latest Summary of Opinions from meetings with market participants revealed differing views on the future pace of Japanese government bond (JGB) purchase reductions, highlighting the difficult balancing act the BoJ faces as bond yields continue to climb.Several participants argued that the need for additional tapering remains limited. One participant stated that the current pace of bond purchases, approximately ¥2.1 trillion per month, should be maintained, while another emphasized that the BoJ should continue purchasing a meaningful amount of JGBs to ensure sufficient liquidity is supplied to the economy as it expands.Others advocated for a more gradual reduction path. One participant suggested reducing purchases by ¥100 billion per quarter, which would bring monthly buying down to roughly ¥1.7 trillion over time.More hawkish views were also expressed. One participant argued that the BoJ’s bond-buying program has already fulfilled its monetary policy objectives and that purchases should eventually be reduced to around ¥1.3 trillion per month. Another suggested that the central bank should continue tapering until bond purchases reach zero, while carefully monitoring market functioning throughout the process.The BoJ began reducing its massive bond purchases in 2024 as part of its broader normalization process following the end of negative interest rates and yield curve control.Under the current plan, the central bank is gradually reducing monthly JGB purchases by approximately ¥200 billion per quarter. The objective is to lower monthly purchases from around ¥5.7 trillion before the tapering process began to roughly ¥2.1 trillion by the first quarter of 2027.At its upcoming policy meetings, the BoJ is expected to review the tapering framework and determine the pace of reductions beyond fiscal 2026. The latest investor feedback suggests market participants remain divided between those favoring a cautious approach and those supporting a faster normalization of the BoJ’s balance sheet.The debate comes at a time when Japanese government bond yields have risen sharply across the curve.Long-term yields have been pushed higher by several factors:Expectations that the BoJ will continue normalizing monetary policy.Reduced central bank demand as bond purchases are scaled back.Rising global bond yields.Concerns over Japan’s large government debt issuance and fiscal outlook.Higher yields create a dilemma for policymakers. On one hand, continued tapering is necessary if the BoJ wants to restore normal market functioning and reduce its dominant presence in the government bond market. The central bank still owns more than half of all outstanding JGBs, a legacy of years of ultra-loose monetary policy.On the other hand, reducing purchases too aggressively risks triggering further increases in yields. A rapid rise in borrowing costs could tighten financial conditions, increase government financing costs, and potentially destabilize parts of the bond market.Recent episodes of volatility in Japan’s super-long bond sector have heightened these concerns. Weak demand at some bond auctions and sharp moves in 20-year, 30-year, and 40-year yields have reinforced the argument of more cautious policymakers and investors who believe the BoJ should slow the pace of tapering.Overall, the opinions lean slightly dovish. While some participants favored eventually reducing purchases toward ¥1.3 trillion or even zero, several others argued that further tapering is not urgently needed and that the current pace of around ¥2.1 trillion per month should be maintained. This reinforces expectations that the BoJ may adopt a more gradual tapering path than some investors had anticipated, particularly given the recent surge in long-dated JGB yields.
This article was written by Giuseppe Dellamotta at investinglive.com.

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