BOJ may pause bond tapering in 2027 as market volatility and fiscal concerns mount – Firstpost

The Bank of Japan (BOJ) is increasingly considering a pause in its bond tapering programme from fiscal 2027, as volatile financial markets and rising government bond yields complicate efforts to unwind more than a decade of ultra-loose monetary policy.

The discussion comes ahead of the BOJ’s June 15-16 policy meeting, where policymakers are expected to review the current bond purchase reduction plan running through March next year and unveil a new roadmap for fiscal 2027. While no changes are anticipated to the existing programme, investors are closely watching whether the central bank will continue reducing bond purchases or maintain the current pace.

According to sources familiar with the deliberations, a pause in tapering is increasingly emerging as the preferred option within the central bank amid uncertainty linked to the Iran conflict and continued turbulence in bond markets. Many market participants are said to favour maintaining the current pace of bond purchases rather than accelerating the withdrawal of support.

The move would mark a significant shift in the BOJ’s quantitative tightening strategy, which began in 2024 under Governor Kazuo Ueda as part of efforts to normalise monetary policy after years of aggressive stimulus.

Political considerations are also playing a role. Rising bond yields could undermine Prime Minister Sanae Takaichi’s plans to cut taxes and increase spending, much of which is expected to be funded through additional borrowing. Policymakers are wary that further tapering could push yields even higher, increasing government financing costs and limiting fiscal flexibility.

Investor concerns have intensified after the yield on Japan’s 10-year government bond climbed to around 2.8 per cent last week, the highest level in three decades. Analysts warn that a move above 3 per cent could significantly increase debt-servicing costs and place additional strain on government finances.

The BOJ’s interest-rate decision could further influence the tapering debate. Markets see a strong possibility of the central bank raising its short-term policy rate to 1 per cent from 0.75 per cent at the June meeting. Economists argue that if policymakers proceed with a rate hike, they may be more inclined to pause quantitative tightening to avoid creating excessive upward pressure on bond yields.

Some investors have already called for the BOJ to suspend further reductions in bond purchases, according to feedback gathered by the central bank earlier this month. Former BOJ officials and market strategists have also suggested that maintaining the current pace of purchases would help stabilise markets while still allowing gradual policy normalisation.

Despite the debate over tapering, the BOJ’s balance sheet is expected to continue shrinking as maturing government bonds roll off its holdings. The central bank’s bond portfolio, currently valued at roughly 500 trillion yen, has already declined by around 20 per cent from its peak in late 2023.