The Bank of Japan is expected to keep its short-term interest rate target at 0.50 percent when it announces policy on Tuesday, perhaps leaving rates unchanged until Q1 2026 according to the latest Reuters poll.
The meeting will not be without some fireworks however with the BOJ Policy Board expected to vote for a slowing of its bond purchases. Governor Kazuo Ueda’s press conference following the announcement will also be closely watched for hints of possible policy tweaks before 2026.
Recent turbulence in Japan’s government bond market has prompted the Finance Ministry to revise its issuance strategy. The ministry is expected to reduce long-term bond issuance, favouring higher-coupon replacements and shorter maturities, while maintaining overall debt levels. Given budget plans and the economy’s needs, there is little chance of the government retiring debt .
The BOJ is under considerable pressure to slow its tapering of bond buys let alone cut back on its JGB/bill holdings . The BOJ held 46 percent of all issuance at the end of last year versus holdings of 14.5 percent by banks, 15.6 percent by insurers and 11.9 percent by foreign investors.
On interest rates, BOJ policy remains hostage to unresolved US tariffs on Japanese exports, and the central bank will be loath to hike rates pending greater clarity, given the importance of exports for Japanese growth.
The impact of import prices on domestic inflation cannot be denied however, and the BOJ will maintain its hawkish bias, awaiting the appropriate catalyst and time to hike again.
Japan’s economy contracted less than initially estimated in the January-March quarter, government data showed, with consumption figures revised upwards at a time when uncertainty surrounding US tariffs is clouding the outlook.
Gross domestic product shrank an annualised 0.2 percent in the three months through March 31, showed revised data from the Cabinet Office, rather than 0.7 percent announced on May 16 which matched economists› median forecast.
Versus the previous quarter, the revision translates as flat in price-adjusted terms compared with an initially estimated 0.2 percent contraction.
