Bank of Japan holds rates, says to slow bond purchase taper

The Bank of Japan (BoJ) on Tuesday opted to keep its interest rates unchanged and announced a slower pace for its reduction of government bond purchases, a decision influenced by concerns over the impact of trade uncertainty on the world’s fourth-largest economy.

For years, the central bank engaged in extensive purchases of Japanese Government Bonds (JGBs) to suppress yields as part of an ultra-loose monetary policy designed to combat stagnation and deflation. However, the BoJ began to shift away from this program last year as inflation started to pick up and the yen weakened, leading to its first interest rate hike since 2007 and the commencement of JGB purchase reductions.

Since then, the BoJ has raised borrowing costs several times, bringing them to 0.5 percent, their highest level in 17 years, and continued to decrease its bond acquisitions. However, analysts suggest that the uncertainty generated by U.S. President Donald Trump’s trade policies has prompted officials to delay further rate hikes. Consequently, on Tuesday, the BoJ held rates steady again and indicated a slower trajectory for JGB reductions.

The new plan involves cutting JGB purchases, in principle, by approximately 200 billion yen each calendar quarter from April-June 2026 onwards, a reduction from the current pace of around 400 billion yen ($2.8 billion) per quarter.

Carol Kong, an analyst at the Commonwealth Bank of Australia, explained the rationale behind the decision. “Slowing the bond taper will help keep interest rates lower than otherwise, providing support to the economy amid heightened trade uncertainty,” she told AFP. Kong added that speculation of such a move “intensified after a surge in the ‘super long’ Japanese Government Bond (JGB) yields in recent months.”

The yen weakened on Tuesday following the announcement, with the dollar trading at around 144.80 yen midday, compared to approximately 144.30 yen on Monday. This reflects the significant interest rate differential between the BoJ’s main rate and the U.S. Federal Reserve’s 4.25-4.5 percent. Lee Hardman of MUFG had noted prior to the decision that “the recent softening of the yen could already partly reflect expectations for a cautious policy update from the BoJ… alongside negative spillovers for Japan from the Middle East conflict.”