The Bank of Japan will consider maintaining its current pace of bond purchases beyond next fiscal year, effectively pausing its quantitative tightening plan, according to four sources familiar with the central bank's thinking.
However, the decision faces a close call as the nine-member board is split. Some members want to soothe investor nerves by slowing the pace of reductions, while others see the need to steadily shrink the BOJ's massive balance sheet.
At its June 15-16 meeting, the BOJ will review its existing taper plan running through March next year and outline a new strategy for fiscal 2027 and beyond. The focus is on whether the BOJ will continue reducing monthly bond purchases beyond fiscal 2027 or keep them at roughly 2.1 trillion yen per month.
Sources, speaking on condition of anonymity, say the BOJ could afford to pause its taper as its holdings will fall significantly simply due to maturing bonds. The central bank may discontinue annual taper plans in favor of an open-ended commitment to buy at 2.1 trillion yen monthly.
Separately, the BOJ is expected to raise its short-term policy rate to 1% from 0.75% at next week's meeting. Investors have already priced in nearly a 90% chance of a rate hike, with focus shifting to whether inflationary pressures from the U.S.-Israeli war on Iran could accelerate future increases.
The BOJ's bond holdings currently stand at around 530 trillion yen, having fallen nearly 20% from a peak in late 2023. The central bank still owns 49% of all Japanese government bonds in the market, making its every move highly influential on yields and Japan's massive debt costs.