(Reuters) -The Bank of Japan kept its interest rates steady on Tuesday and said it would slow the pace of reduction in its bond purchases next year, signalling a cautious approach to unwinding its decade-long monetary stimulus. As widely expected, the central bank maintained short-term interest rates at 0.5% by a unanimous vote at the […]
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Investors react to BOJ decision to stand pat on interest rates
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(Reuters) -The Bank of Japan kept its interest rates steady on Tuesday and said it would slow the pace of reduction in its bond purchases next year, signalling a cautious approach to unwinding its decade-long monetary stimulus.
As widely expected, the central bank maintained short-term interest rates at 0.5% by a unanimous vote at the two-day policy meeting that ended on Tuesday.
The decision comes amid escalating Middle East tensions and new U.S. tariffs, complicating the BOJ’s efforts to raise still-low interest rates and shrink a balance sheet now roughly the size of Japan’s economy.
The 10-year JGB yield rose 1.5 basis points to 1.465% on the news, while the yen was flat at 144.795 against the dollar.
QUOTES
NORIHIRO YAMAGUCHI, SENIOR JAPAN ECONOMIST, OXFORD ECONOMICS, TOKYO:
“The Bank of Japan’s decision to slow the pace of QT in FY2026 is an attempt to placate nervous bond markets following a recent spike in ultra-long JGB yields. It appears that the bank is prioritizing market stability during the process of normalizing its balance sheet. It could potentially harm the real economy and the government’s finances if it spreads to shorter-term yields.
“QE is likely to continue to be an essential policy tool, given that the JGB market could become more fragile amid heightened fiscal concerns and changes in the market structure.”
TOHRU SASAKI, CHIEF STRATEGIST, FUKUOKA FINANCIAL GROUP, TOKYO:
“The reaction is muted. Probably the market will wait more for more nuance from Governor Ueda. The BOJ still has a huge amount of the JGBs and it’s not decreasing that much. So in that case, the slowdown of the purchasing pace is probably partly because of the volatile market for JGBs and also the uncertainty over the global economy.
“It’s difficult to hike rates because we are still under uncertainty over the tariffs of the United States and also now another uncertainty comes from the Middle East.
“I think the BOJ will continue to stress the uncertainty in the global economy and then use that situation as an excuse for no action. If this kind of a situation continues, I think BOJ cannot hike interest rates within this year.”
MIKI DEN, A SENIOR JAPAN RATE STRATEGIST, SMBC NIKKO SECURITIES, TOKYO:
“A reduction of bond buying amounts for maturities up to 10 years suggests that the BOJ wants the market to decide the yields, while for the super-long bonds, the BOJ kept the purchase amount the same to respond to the balance of supply and demand.”
KHOON GOH, HEAD OF ASIA RESEARCH, ANZ, SINGAPORE:
“All in all, really no surprise.
“Given the global economic uncertainty and the geopolitical situation in the Middle East, I’ll say the BOJ is not going to be in any hurry to continue to normalise rates at this stage.
“Our view is that the BOJ needs to normalise, because inflation is looking like it is stubbornly above the BOJ’s 2% target. A weak yen is definitely one of the causes for the upward pressure on inflation, and especially with the recent spike up in oil prices due to the geopolitical uncertainty, that’s going to add a bit more near-term upside risk to inflation as well, given that Japan is a major importer of oil.”
SHOKI OMORI, CHIEF DESK STRATEGIST, MIZUHO SECURITIES, TOKYO:
“There was no decrement in BOJ purchases for maturities between 10 and 25 years, nor for those exceeding 25 years. Some observers found the reduction in the number of operations targeting medium- to long-term maturities unexpected — perhaps even puzzling.
“Still, questions linger as to whether trimming the amount offered per operation is necessarily detrimental; in highly volatile market conditions, a greater frequency of more modest offers could arguably be advantageous.
“Despite referencing domestic political developments, tariff negotiations and Middle East geopolitical tensions, the BOJ highlighted a steady rise in inflation, maintaining a possible pathway for another rate hike this year — potentially in October – and prompting trading strategies geared toward yield curve flattening.”
HIROFUMI SUZUKI, CHIEF FX STRATEGIST, SMBC, TOKYO:
“The decision was almost as expected, with no surprises. The financial markets have remained calm following the policy announcement. The tone of the previous press conference was very dovish, so market participants are watching closely to see if there will be any significant changes. In particular, market participants are paying attention to comments on tariffs and the recent rise in prices.”
CHARU CHANANA, CHIEF INVESTMENT STRATEGIST, SAXO, SINGAPORE:
“By slowing the pace of its bond tapering from next fiscal year, it’s signaling sensitivity to recent market volatility, especially at the long end. The move helps avoid a sharper spike in JGB yields, offering some relief to investors. But by keeping the current quarterly 400 billion yen pace until April, it also reaffirms a steady, predictable exit path — consistent with Ueda’s focus on letting markets take over gradually.”
SAISUKE SAKAI, SENIOR ECONOMIST, MIZUHO RESEARCH AND TECHNOLOGIES, TOKYO:
“The focus for this meeting was on the pace of bond tapering, not rate decisions. The slower pace of bond tapering was what the market had hoped for and it help prevent long-term interest rates from shooting up. In that sense it could help reduce risks of sharp rises in long-term interest rate, when the BOJ decides to raise the policy rate again.”
KOTA SUZUKI, SENIOR STRATEGIST, NOMURA ASSET MANAGEMENT, TOKYO:
“I don’t expect the next interest rate hike to take place soon. The trade policy is still unclear, and nothing was decided at the Japan-U.S. bilateral meeting. Even if tariffs are decided, we need to confirm how they will affect corporate performance and whether wage increases next year will be feasible.
“If oil prices continue to rise (due to the Middle East conflict), it will directly affect Japan’s prices with a lag. That will become a concern for the BOJ. Due to cost-push factors, the bank needs to suppress price hike slightly, but in an uncertain economic environment, the bank cannot move to raise interest rates, leaving it in a state of paralysis.”
KATSUTOSHI INADOME, SENIOR STRATEGIST, SUMITOMO MITSUI TRUST ASSET MANAGEMENT:
“The BOJ could have reduced bond buying across the curve, but instead it reduced those for a maturity of less than 10 years. That is because the central bank considered a recent surge in yields in super-long bonds.”
JESPER KOLL, GLOBAL AMBASSADOR, MONEX GROUP, TOKYO:
“We obviously have had the inflation numbers coming in ahead of what the Bank of Japan had been forecasting, and some of that is because of rice. So, the focus on the next rate hike is the correct focus because evidence continues to mount that demand-pull inflation is turning into the main driver of why inflation surprises on the upside, if you look through this rice price volatility.
“For the Bank of Japan, the pragmatism of listening to market concerns, with spending with the technical adjustment, is staying the course of privatising debt markets.”
“I think it’s very clear that the move in the 20 and 30 (year JGBs) was global investors and not Japanese domestic investors.
“Obviously everything is data-dependent, as they say, but for all intents and purposes, this time next year, the policy rate being at one and a quarter to 1.5%, I think is the correct forecast.”
(Reporting by Reuters Asia markets team; Editing by Sherry Jacob-Phillips)