BOJ urged to boost bond buying in wake of spike in super-long yields

A Bank of Japan survey revealed that some market participants are urging the BOJ to increase purchases of super-long bonds or halt tapering of that maturity due to sharp yield increases and declining liquidity, while most saw no need to tweak the existing taper program. The survey highlights the BOJ's challenge in unwinding its stimulus as yields on super-long JGBs hit all-time highs amid calls for increased fiscal spending, influencing the BOJ's upcoming review of its quantitative tightening plan at the June 16-17 policy meeting. While opinions were divided on the pace of tapering from fiscal year 2026, most called for maintaining or slightly slowing the pace, heightening the chance the BOJ will proceed slowly in reducing its balance sheet.

Analysis

The Bank of Japan (BOJ) faces mounting pressure regarding its quantitative tightening strategy, specifically concerning super-long Japanese Government Bonds (JGBs), where yields have surged to all-time highs amidst declining market liquidity. A recent BOJ survey of market participants indicates that some are advocating for increased purchases of these super-long bonds or a halt to tapering for this maturity due to these adverse market conditions, which are exacerbated by political calls for fiscal stimulus ahead of an upper house election. While most survey respondents see no immediate need to alter the BOJ's current taper program—which aims to halve monthly bond buying to 3 trillion yen by March 2026, reducing its $3.9 trillion balance sheet by up to 8%—there is considerable divergence on the appropriate tapering pace from fiscal year 2026. Opinions range from ceasing JGB purchases altogether to continuing them at up to 3 trillion yen per month. Notably, a prevailing sentiment favors maintaining or slightly slowing the current tapering pace, suggesting the BOJ is likely to proceed cautiously in reducing its substantial balance sheet, where it still holds roughly half of outstanding JGBs. The central bank, which only exited its massive stimulus and negative interest rates last year, will review its quantitative tightening plan at its upcoming June 16-17 policy meeting, taking these survey findings into account. The situation underscores the delicate balance the BOJ must strike between normalizing policy and maintaining market stability, especially as some participants recommend a reduction in the quarterly taper size from 400 billion yen to around 200 billion yen to mitigate risks during market instability.

Key Decisions for Investors

• Investors should closely monitor the Bank of Japan's June 16-17 policy meeting for potential adjustments to its bond purchase program, particularly regarding super-long maturities, given the articulated concerns over yield spikes and liquidity.
• Consider the implications of persistent upward pressure on super-long JGB yields and declining liquidity, as these factors may compel the BOJ to adopt a more accommodative stance than previously signaled for specific segments of the bond market.
• Anticipate that the BOJ will likely continue its path of balance sheet reduction at a very gradual pace, reflecting the cautious sentiment from market participants and the central bank's recent history of slow policy normalization.