Japan is tapering

The Bank of Japan continues with the reduction in its monthly purchases of Japanese Government Bonds (JGBs). This process, often referred to as tapering or quantitative tightening, began earlier, with a key initial plan announced in July 2024 to gradually reduce monthly purchases from around 5.7 trillion yen to about 3 trillion yen by January-March 2026, via quarterly cuts of approximately 400 billion yen.

In June 2025, during its Monetary Policy Meeting, the BOJ conducted an interim assessment of this plan and decided on an extension/adjustment: (1) It maintained the ongoing reduction pace of about 400 billion yen per calendar quarter until January-March 2026. (2) From April-June 2026 onward, it slowed the pace to about 200 billion yen per quarter. (3) The goal is to reach approximately 2 trillion yen in monthly purchases by January-March 2027. The BOJ emphasized continuing reductions in a predictable way to improve JGB market functioning and allow long-term interest rates to form more freely in the market, while retaining flexibility (e.g., increasing purchases if needed for stability amid sharp rate rises). Asa consequence, the long term of the curve continues to reach new highs in yield, and the cost of new debt is increasing as well. From the outside, it looks like a suicidal move from the Japanese government, since very few investors will front run the government to buy bonds when they’re selling. It does make JGBs more attractive, but investors may need a much higher premium to invest. The impact on the rest of the world is not clear yet, but the Yen carry trade and the massive position in U.S. treasuries are at risk. At the same time, Japan is militarizing again, for the first time since the end of World War II, increasing the budget in defense. What can go wrong?

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