Bank of Japan Set to Reduce JGB Purchases, Maintains Interest Rate

Key Decisions and Statements

The BOJ kept short-term interest rates steady at between 0% to 0.1%, as widely anticipated. However, it indicated the possibility of reducing JGB purchases following the next monetary policy meeting scheduled for July 30 and 31. This decision was passed with an 8-1 majority vote, with board member Nakamura Toyoaki dissenting. Toyoaki supported the reduction of JGB purchases but argued that the decision should be made after reassessing economic activity and prices in the July 2024 outlook report.

Future Plans

Leading up to the next meeting, the BOJ plans to collect views from market participants and develop a detailed plan for reducing its purchase amount over the next one to two years. In the meantime, the BOJ will continue its purchases of JGBs, commercial paper, and corporate bonds as decided in the March monetary policy meeting.

Market Reactions

Following the BOJ's announcement, the Japanese yen weakened by 0.52% to 157.84 against the U.S. dollar, while the yield on the 10-year JGB fell by 44 basis points to 0.924%. The benchmark Nikkei 225 index rose by 0.68%, reversing earlier losses, and the Topix index increased by 0.71%.

Recent Policy Changes

In March, the BOJ raised interest rates for the first time in 17 years, ending the world’s last negative rate regime and scrapping the yield curve control policy. Despite this, the central bank continued to purchase JGBs at a rate of about 6 trillion yen ($38.17 billion) per month to stabilize 10-year JGB yields around the 1% level. However, these large-scale purchases have indirectly put additional downward pressure on the already weak yen.

Currency Concerns

On May 8, BOJ Governor Kazuo Ueda stated that the central bank would closely monitor the yen’s recent declines in guiding monetary policy. This statement came after the yen slipped to a 34-year low, trading at 160 against the dollar in late April, prompting the BOJ to intervene to support the currency. “Sharp, one-sided yen falls are negative for the economy and therefore undesirable,” Ueda told parliament, adding that such volatility makes it difficult for companies to set business plans. He emphasized that if currency volatility affects or risks affecting trend inflation, the BOJ must respond with monetary policy adjustments.