Bank of Japan considering smaller reductions in bond buying

Bank of Japan officials are reportedly considering slowing the pace of their government bond buying reductions at the upcoming policy meeting later this month. The internal debate centers on reducing the current paring pace of ¥400 billion per quarter to ¥200 billion per quarter starting in April, with an amount between those figures also possible; the new plan will cover approximately one year. Governor Ueda's board will review the existing bond-buying program and map out a plan for purchases beyond March, with the BOJ likely to signal flexibility by stating its readiness to intervene in exceptional cases.

Analysis

Bank of Japan (BOJ) officials are reportedly contemplating a deceleration in the reduction of their government bond purchases at the policy meeting scheduled to conclude on June 17. The internal discussions center on potentially reducing the quarterly paring pace from the current ¥400 billion to ¥200 billion starting April of the following year, or maintaining the existing pace, with an intermediate figure also being considered for a new plan anticipated to last approximately one year. This deliberation occurs even as Governor Kazuo Ueda has previously signaled continued reductions in purchases, and against the backdrop of an existing plan to halve monthly purchases to around ¥3 trillion by early next year. The consideration of a slower quantitative tightening (QT) trajectory, reflected in a 'dovish' market sentiment assessment, suggests a more gradual approach to policy normalization than some market participants may have anticipated. The BOJ is also expected to reiterate its readiness to intervene in the market under exceptional circumstances, signaling a commitment to operational flexibility.

Key Decisions for Investors

• Investors should closely monitor the BOJ's June 17 policy announcement for definitive guidance on the pace of bond purchase reductions, as a slower tapering could imply sustained downward pressure on Japanese Government Bond yields and potentially influence yen valuations.
• Consider reviewing exposures to Japanese fixed income and currency markets, as a more dovish stance than previously priced in could necessitate adjustments to reflect a potentially more gradual monetary policy normalization path.
• Evaluate the implications of the BOJ's stated readiness for market intervention, which, while providing a backstop against excessive volatility, also underscores a cautious approach to fully unwinding its accommodative policies.