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Increasing long-term borrowing costs, persistent inflation, and a series of weak debt auctions are intensifying pressure on the Bank of Japan ahead of its upcoming monetary policy meeting.
Last month, yields on 30-year bonds reached a record high of 3.2 percent, driven by a continuous withdrawal of buyers from domestic life insurers. Although yields have dropped to approximately 2.9 percent, many analysts believe the Bank of Japan (BoJ) faces a challenging situation, particularly as it has started to taper its long-standing bond-buying program. Yields and prices move in opposite directions.
The BoJ meeting coincides with discussions by the government about the possibility of repurchasing previously issued long-term bonds, a rare measure intended to stabilize the market, according to sources familiar with the situation.
Market experts largely do not anticipate the central bank to increase interest rates from their current level of about 0.5 percent at the upcoming meeting. This uncertainty is compounded by an inability to reach an agreement in the recent tariff talks between Tokyo and Washington.
Many economists are increasingly inclined to believe that the BoJ is unlikely to raise rates until early next year. Nevertheless, markets estimate about a 50 percent chance of a rate increase by December, with a smaller group thinking it might happen as early as October. According to some economists, a rate hike could come sooner if market volatility settles, allowing the yen to stabilize against the US dollar.
Traders indicate that the main focus next week will be on how the BoJ intends to manage a program initiated a year ago, which involves the central bank slowing down its extensive purchases of Japanese government bonds.
This decision will be influenced by feedback from both buyers and sellers in the market.
Since last year, the central bank has been reducing its purchases of Japanese government bonds (JGBs) by ¥400 billion ($2.8 billion) quarterly. Citi analysts predict that this reduction will persist at that rate until the first quarter of next year, after which it might drop to ¥200 billion per quarter for the twelve months starting in April.
Tapering of bond purchases “is now on autopilot, and any future hawkish moves are likely to involve policy rate adjustments,” noted Katsuhiko Aiba, a Citi economist in Japan.
Goldman Sachs economists anticipate a more gradual reduction in purchasing over the next year, ultimately reaching a level of ¥2 trillion monthly.
A critical point of interest for Bank of America economists is whether the BoJ will indicate a plan for another interim assessment in 2026 and whether it will express its viewpoint on the maximum “terminal” purchase quantity of JGBs for the future.
There are also rising speculations that the Ministry of Finance might cut back on issuance at the super-long maturity segment after it was revealed last month that it was consulting prime brokers and other market players about their market perceptions.
