(Reuters) – The Bank of Japan announced on Tuesday that it plans to keep interest rates steady and will reduce its bond purchases next year, signaling a cautious approach towards a financial stimulus that has lasted a decade.
As was largely anticipated, the central bank voted unanimously to maintain its short-term interest rate at 0.5% during its two-day policy meeting that wrapped up on Tuesday.
This decision could complicate the BOJ’s efforts to eventually raise low interest rates and shrink its balance sheet, especially in light of ongoing tensions in the Middle East and new US tariff increases.
In response to the announcement, JGB yields increased by 1.5 basis points in 2010, reaching 1.465%, while the yen remained stable at 144.795 against the dollar.
Yorihiro Yamaguchi, Senior Japanese Economist at Oxford Economics in Tokyo, noted, “The decision to slow down the QT pace in 201026 is meant to calm the jittery bond market following the recent surge in long-term JGB yields. It seems banks are focusing on stabilizing the market as they normalize their balance sheets.”
He also remarked, “Quantitative easing might still be a crucial tool since the JGB market could become more susceptible due to fiscal concerns and ongoing shifts in market structure.”
Torasaki, Chief Strategist at Fukuoka Financial Group in Tokyo, commented, “The reaction is likely to be subdued. Perhaps the market will look for more insights from Governor Ueda. The BOJ has a substantial amount of JGBs, which means a big drop hasn’t occurred. The pacing reduction seems to reflect the uncertain nature of the JGB landscape and the global economy.”
He added, “There’s still uncertainty surrounding US tariffs, and with new issues arising in the Middle East, it complicates raising interest rates. I think the BOJ will continue to underscore the uncertain state of the global economy and use that as a rationale for inaction. If this trend persists, I don’t foresee any interest rate hikes happening this year.”
Miki Den, Senior Fee Strategist at SMBC Nikko Securities in Tokyo, suggested, “Reducing bond purchases for maturities of up to 10 years signifies the BOJ wants the market to set yield rates. However, for longer bonds, they maintained the same purchase level to balance supply and demand.”
Khoon Goh, Head of Asian Studies at ANZ in Singapore, pointed out, “Overall, there’s not much surprise here. Considering the global economic uncertainties and geopolitical issues in the Middle East, the BOJ seems in no rush to normalize rates at this time.”
He added, “We believe that the BOJ should normalize since inflation appears to be consistently above the BOJ’s 2% target, with the weak circle definitely contributing to upward inflation pressures.”
Grassland Shoki, Chief Desk Strategist at Mizuho Securities in Tokyo, remarked, “There hasn’t been a decrease in BOJ purchases for maturities between 10 and 25 years, nor for longer durations. Some have noticed a decline in operations aimed at unexpected medium to long-term maturities.”
He continued, “Nonetheless, it raises questions about whether cutting the amount for each operation is inherently detrimental. In unstable market conditions, more cautious offers may be beneficial.”
Despite focusing on domestic political developments and geopolitical tensions, the BOJ noted rising inflation, keeping options open for further rate hikes and recommending a stacked trading strategy in October.
Hirofumi Suzuki, Chief FX Strategist at SMBC in Tokyo, said, “This decision was not unexpected and didn’t evoke much of a reaction in financial markets. The previous press conference had such disruptions that investors are closely watching for significant changes, particularly regarding tariffs and price increases.”
Chalchanana, Chief Investment Strategist at Saxo in Singapore, stated, “Slowing the bond pace from the next fiscal year shows sensitivity to recent market volatility, especially on the long end. This adjustment will help prevent sharp spikes in JGB yields and offer some relief to investors.”
Saisuke Sakai from Mizuho Research and Technologies in Tokyo pointed out, “The focal point of this meeting was less about interest rate decisions and more about the tapering of bonds. The gradual reduction in bond purchases aligned with market desires and helped keep long-term interest rates from soaring.”
Kota Suzuki, Senior Strategist at Nomura Asset Management in Tokyo, remarked, “I don’t expect a rate hike anytime soon. Trade policies remain unclear, and nothing was settled in the recent bilateral discussions with Japan. Even with potential tariff resolutions, we need to observe their impact on business outcomes and wage growth next year.”
He noted, “Should oil prices continue to rise due to the tensions in the Middle East, it would directly affect prices in Japan—a concern for the BOJ. Due to cost pressures, banks need to be cautious with pricing decisions, but the uncertain economic climate restricts their ability to raise interest rates, potentially paralyzing them.”
Katsutoshi Inadome, Senior Strategist at Mitsui Trust Asset Management, mentioned, “The BOJ could have reduced bond purchases across the board, but it specifically cut those for maturities under 10 years due to the spike in ultra-long bond yields.”
Jesper Koll, Global Ambassador at Monex Group in Tokyo, stated, “We clearly brought in inflation numbers that surpassed the Bank of Japan’s forecasts, partly driven by the US, making the focus on the next rate hike quite relevant.
He concluded, “For the Bank of Japan, acknowledging market concerns translates into tactical adjustments to maintain progress on privatizing the debt market.”
“I believe it’s evident that the 20-year and 30-year JGBs from 2019 were primarily bought by global investors, not domestic ones,” he added.
“While everything remains dependent on data, it seems fair to predict that the policy rate will sit between 1.25% and 1.5% next year,” he remarked.
