Bank of Japan Eyes Slower Bond Tapering Amid Inflation, Global Risks

The Bank of Japan (BOJ) is set to announce a cautious approach to quantitative tightening (QT), considering a slower pace of bond purchase reductions for fiscal 2026 to avoid market disruption. At its policy meeting concluding Tuesday, the BOJ is widely expected to keep short-term rates at 0.5% and review its bond tapering strategy, which currently reduces purchases by ¥400 billion ($2.77 billion) per quarter.

Sources indicate the central bank may lower the tapering pace to ¥200 billion ($1.38 billion) per quarter starting next fiscal year. This move reflects concerns over rising long-term bond yields and requests from market participants to ease the taper’s intensity. If adopted, monthly bond purchases could fall to around ¥2 trillion by March 2027.

Governor Kazuo Ueda is expected to reaffirm the BOJ’s commitment to interest rate normalization while balancing risks from escalating U.S. tariffs and geopolitical tensions, particularly the Iran-Israel conflict. Ueda will hold a press conference at 3:30 p.m. JST to detail the bank’s decision.

Despite global uncertainties, Japan’s economy continues to show inflationary momentum. Core consumer inflation hit 3.5% in April, driven by surging food prices and rising labor costs. Businesses are responding with wage increases, supporting the BOJ’s case for continued tightening. However, the board remains cautious as export demand weakens under global trade pressure.

The central bank ended yield curve control in 2024 and began tapering its massive asset purchases, aiming to halve monthly bond buying to ¥3 trillion by March 2026. Still, with inflation exceeding the 2% target and fresh economic headwinds looming, the pace of policy normalization remains delicate. Markets now await Ueda’s guidance on potential timing for the next rate hike.