The Bank of Japan maintained interest rates unchanged as scheduled and will slow down the pace of reducing asset purchases next year.

The Bank of Japan maintained its target interest rate at 0.5%, in line with market expectations, and kept policy unchanged for the third consecutive meeting. The bank also announced that it would slow down the pace of reducing bond purchases starting from the next fiscal year. Following the announcement, Japanese government bond futures prices fell by 0.1%, and the yields on 5-year and 10-year Japanese government bonds rose by 1.5 basis points each, while the yen against the US dollar showed little change. The Bank of Japan has slowed down the pace of reducing its monthly bond purchase scale. Starting from April 2026, the monthly reduction amount will decrease from the current 400 billion yen per quarter to 200 billion yen per quarter; it is expected that the total purchases from January to March 2027 will be around 2 trillion yen. Analysts note that this is roughly equivalent to the level of bond purchases before the bank implemented ultra-loose monetary policy in 2013. The Bank of Japan's policy board voted 8-1 in favor of the bond reduction plan. Board member Naoki Tamura dissented from this specific decision, proposing that the Bank of Japan continue to reduce its purchases by 400 billion yen per quarter in the 2026 fiscal year. Rodrigo Catril, a strategist at the National Bank of Australia Limited in Sydney, stated, "Reducing the scale to 200 billion yen will alleviate concerns about further spikes in Japanese government bond yields, especially in long-term bonds. Previous concerns were that the Bank of Japan might keep the reduction scale at 400 billion yen." The market has been closely watching the speed of bond purchase reduction, as there is a general expectation that the Bank of Japan will keep interest rates unchanged, given uncertainties in US policies and tariffs. A survey of 53 economists conducted by institutions showed that 65% of respondents predicted that the bank would begin to slow the pace of reducing bond purchases in April next year. The slowdown in asset contraction on the balance sheet suggests that the Bank of Japan is concerned about market disruptions following a spike in ultra-long-term government bond yields last month. The quarterly reduction scale aligns with requests from several bond market participants received at the bank's meeting last month. The Bank of Japan stated that it will conduct a mid-term review of the reduction plan for the 2026 fiscal year at its policy meeting in June next year. In a statement, the Bank of Japan said, "If long-term interest rates rise rapidly, the Bank of Japan will act swiftly, such as increasing bond purchases." Last year, the Bank of Japan ended its yield curve control policy and began reducing its large-scale bond purchases. In January this year, as it saw progress towards achieving the 2% inflation target, the Bank of Japan raised short-term interest rates to 0.5%. The normalization process of the Bank of Japan's policy is at a critical stage, as high US tariffs have severely impacted Japan's export-reliant economy, prompting the board to lower its economic growth and inflation expectations on May 1. Japanese Prime Minister Shizo Abe and US President Trump agreed on Monday to push forward trade negotiations but failed to reach a breakthrough agreement that could reduce or eliminate tariffs threatening the export-reliant economy. The escalating conflict between Iran and Israel is causing more trouble for policymakers, as it could push up oil prices and exacerbate market volatility, disrupting price expectations. However, if rate hikes are delayed in the long term, the Bank of Japan may fall behind in dealing with inflation pressures, as businesses continue to pass on rising raw material and labor costs to consumers. Japan's core consumer inflation rate in April reached its highest level in over two years, at 3.5%, well above the Bank of Japan's 2% target, as food prices soared by 7.0%, increasing expectations for continued wage hikes due to labor shortages. Decision-makers at the Bank of Japan, including Governor Haruhiko Kuroda, have stated that as long as economic recovery continues and inflation levels can stabilize around the bank's target of 2%, they are ready to continue raising interest rates. Furthermore, globally, long-term bond yields have been rising due to concerns about fiscal policy. In Japan, the yields on 30-year and 40-year bonds have reached their highest levels since issuance, prompting rumors that the Japanese Ministry of Finance may adjust the issuance size to calm investor panic. These measures have had a global impact on bond markets, contrasting sharply with the situation a few years ago. At that time, the Bank of Japan's yield curve control mechanism played a global benchmark role and exerted some constraint on borrowing costs. The market will closely watch the press conference of Bank of Japan Governor Haruhiko Kuroda this afternoon for any clues about the timing of the next rate hike.