Bank of Japan to trim bond buying, keeps rates steady

While it will continue to buy government bonds at the current pace of roughly 6 trillion yen ($38 billion) per month, the central bank decided to lay out details of its tapering plan for the next one to two years at its July meeting.

“We will conduct purchases in accordance with our decision made at the March meeting,” the BOJ said in a statement, maintaining a phrase put in place at its previous meeting in April that commits to buying bonds at the current pace.

“We also decided to reduce our purchase amount thereafter to ensure that long-term interest rates would be formed more freely in financial markets,” it said.

The BOJ said it will collect views from market players before deciding on the long-term tapering plan at its next meeting. As widely expected, the BOJ kept its short-term policy rate target in a range of 0-0.1% by a unanimous vote. Markets are focusing on how Governor Kazuo Ueda, at his post-meeting briefing at 0630 GMT, reconciles recent weak signs in the economy with the bank’s current projection that Japan will make steady progress towards achieving its price target. The BOJ exited negative rates and bond yield control in March in a landmark shift away from a decade-long, radical stimulus programme.

It has also dropped signs that it will keep raising short-term rates to levels that neither cool nor overheat the economy – seen by analysts as being somewhere between 1-2%.

The central bank is also under pressure to embark on quantitative tightening (QT) and scale back its $5 trillion balance sheet to ensure the effects of future rate hikes smoothly feed into the economy.

Nearly two-thirds of economists polled by Reuters had expected the BOJ to start tapering its monthly bond buying on Friday.

The BOJ’s efforts to normalise monetary policy come as other major central banks, having already tightened monetary policy aggressively to combat soaring inflation, look to cut rates.

The Federal Reserve held interest rates steady on Wednesday and signalled the chance of a single cut this year. The European Central Bank cut interest rates last week for the first time since 2019.

However, the normalisation of Japan’s still-loose monetary policy is clouded by weak consumption and doubts over the BOJ’s view that robust domestic demand will keep inflation on track to durably hit its 2% target.

Receding prospects of steady U.S. interest rate cuts may also keep the yen weak against the dollar, complicating the BOJ’s policy deliberations.

Japan’s battered currency has become a headache for policymakers by inflating import prices, which in turn boosts living costs and hurts consumption.

Some analysts see the BOJ’s bond tapering among tools the central bank can use to slow the yen’s declines by allowing long-term interest rates to rise more freely. ($1 = 157.9400 yen)