The Japanese government bond turmoil may abate! Former Bank of Japan official makes a major prediction: the pace of debt reduction may slow down in the next fiscal year.

An executive committee member who was once responsible for the execution and operation of monetary policy at the Bank of Japan said that the Bank of Japan is likely to announce at the upcoming monetary policy committee meeting that it will significantly slow down the pace of reducing government bond purchases (tapering) in the next fiscal year. Statistical data shows that since last summer, the Bank of Japan has been cutting its monthly bond purchases by as much as 400 billion yen (approximately 2.8 billion US dollars) per quarter. However, with Japanese inflation continuing to rise since the beginning of this year and significantly exceeding the Bank's 2% target, Japanese government bonds have been caught in a selling frenzy. Without the Bank of Japan's strong purchasing power in the Japanese bond market, market demand for yields on long-term Japanese government bonds continues to expand, leading to a continuous surge in Japanese government bond yields, especially for long-term bonds of 10 years or more, and causing negative shocks to global financial markets recently. Therefore, the most focused issue at the two-day monetary policy meeting scheduled to end on June 17th is whether the Bank of Japan will continue to maintain the tapering pace of bond purchases in the 2026 fiscal year (which starts in April 2026). If the Bank of Japan clearly signals in its statement after the meeting that it will slow down the tapering of bond purchases in the next fiscal year or at another time, the recent "Japanese government bond selling storm" hovering over the financial markets may finally come to an end, significantly reducing the pessimistic sentiment among market participants that Japanese government bonds could trigger a global market collapse. "The Bank of Japan could potentially slow down the pace of tapering to about 200 billion yen per quarter," said Eiji Maeda, a former executive committee member of the Bank of Japan, in an interview on Monday. "That's about half of the current pace, and I don't expect them to maintain the 400 billion yen speed anymore." Maeda was mainly in charge of the Bank of Japan's execution and operations in the market before leaving the Bank. According to the current plan, the Bank of Japan is moving towards reducing its monthly bond purchases to the target of 2.9 trillion yen by early next year. Maeda said that about a year later, this amount could further decrease to about 2 trillion yen, comparable to the amount of government bond purchases before the Bank of Japan launched its large-scale easing policy in 2013. "That will be a reference point," said the former central bank official who is currently the director of the Chibagin Research Institute. "In addition, after the intensified global financial market volatility, the Bank of Japan has no reason to be fixated on the reduction scale of 400 billion yen, and they are not sure what will happen in the future." The Bank of Japan's monetary policy committee, led by Governor Kikuo Iwata, plans to review the current bond purchase plan up to March 2026 and beyond at the meeting next week. Traders have recently focused on how the Bank of Japan's tapering plan for the next fiscal year will change against the backdrop of increased volatility in the ultra-long bond market. "The Bank of Japan is indeed concerned about ultra-long bonds, but they will not intervene unless it causes extreme instability in global financial markets and systems," Maeda said in the interview. "Once the central bank begins to intervene extensively, it may become embroiled in an endless game, opening up an endless game with the market." Insiders told the media earlier this month that policy makers at the Bank of Japan may consider slowing down the pace of government bond purchases at the June monetary policy meeting. However, recent hints from Governor Iwata suggest that the Bank of Japan will continue to reduce the scale of bond purchases, which has sparked great interest among market participants in the upcoming new blueprint for reducing bond purchases and the planned duration. Maeda expects that once the monthly bond purchase scale drops to around 2 trillion yen by early 2027, the Bank of Japan will temporarily stop further adjustments to bond purchases to signal "no further reduction in scale" to the market. It is widely expected that the Bank of Japan will keep its benchmark interest rate unchanged at 0.5% next week. Maeda said that the timing of the next rate hike by the Bank of Japan will depend on the tariff measures and economic impact by U.S. President Donald Trump, as well as trade negotiations with the Japanese government. He added that if there are no major shocks, the next rate hike could take place in the autumn of this year. Data confirmed on Monday showed that Japan's GDP shrank in the first quarter, but by a smaller margin than previously estimated, supporting the Bank of Japan's cautious stance. "October may be the earliest point," Maeda said. "But if the Bank of Japan wants to have sufficient confidence for next year's spring wage negotiations, it may wait until March next year." After the next interest rate adjustment, the Bank of Japan is likely to raise rates every six months, with the target terminal rate between 1.5% and 2%, higher than the market's general expectation of 1%, Maeda said in the interview. Japan's core inflation indicator has been at or above the Bank of Japan's 2% target for three consecutive years (as of April), and is currently the highest among the G7 countries. Maeda believes that the Bank of Japan has somewhat lagged behind the curve, but the uncertainty brought by recent tariff policies temporarily provides a significant reason for the Bank's inaction. "The Bank of Japan must be very cautious," Maeda said. "When dark clouds hang over the economy, they should not rush to normalize policies, but they must also avoid the risk of falling behind the situation."