Bank of Japan considers pausing bond-buying taper as JGB yields fall

Japan’s central bank is quietly debating whether to hit the brakes on one of the most consequential monetary policy shifts in its modern history. The Bank of Japan is weighing a pause in its ongoing reduction of government bond purchases beyond the fiscal year ending March 2027, according to sources familiar with the bank’s internal deliberations.

The discussion arrives at a particularly tense moment. 10-year Japanese government bond yields spiked to 2.8% on May 18, the highest level in roughly 29.5 years, a reminder that unwinding decades of ultra-loose monetary policy is less like flipping a switch and more like defusing a bomb.

What the BOJ is actually considering

The BOJ has been trimming its massive bond purchases since July 2024, initially cutting around 400 billion yen per quarter. That pace has already slowed considerably, dropping to 200 billion yen per quarter starting April 2026.

Current plans target monthly JGB purchases of roughly 2 to 3 trillion yen, with the goal of reaching approximately 2 trillion yen by the first quarter of 2027. The question now is what happens after that.

At the upcoming policy meeting scheduled for June 15-16, the BOJ will formally review its tapering schedule and discuss plans extending into fiscal year 2027. While opinions on the board are divided, the prevailing inclination appears to favor maintaining the current monthly purchase level rather than pushing reductions further.

A BOJ survey conducted in May found that some investors are explicitly calling for a cessation of tapering starting in fiscal 2027. The reasoning is straightforward: market volatility has been brutal, and participants want breathing room.

Governor Kazuo Ueda has publicly emphasized the importance of closely monitoring bond market trends, a diplomatic way of saying the recent yield spike got everyone’s attention.

Why JGB yields matter far beyond Tokyo

To understand why this matters, consider the scale. The BOJ currently holds about 49% of all outstanding Japanese government bonds. That’s nearly half the entire market sitting on one institution’s balance sheet.

The yield surge hasn’t happened in a vacuum. Geopolitical energy shocks and persistent inflation concerns have amplified the volatility. Meanwhile, fiscal strategies proposed by Prime Minister Sanae Takaichi’s administration add another layer of complexity, raising questions about how Japan will manage its enormous public debt if borrowing costs keep climbing.

The tapering initiative was originally designed with flexibility provisions to adapt to market dynamics. That built-in escape valve is now being tested in real time.

From ultra-loose to cautiously less loose

Under Governor Ueda’s leadership, the BOJ has been systematically dismantling its extraordinary monetary framework since 2024. This includes removing yield-curve control measures, the mechanism that effectively capped long-term interest rates regardless of market forces.

The June 15-16 meeting will also reportedly touch on the topic of interest rate hikes, though there appears to be little immediate urgency to accelerate on that front.

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