The Bank of Japan is considering a plan to cut its Japanese government bond purchases by half. Starting in April 2026, quarterly purchases may decrease to 200 billion yen, approximately $1.4 billion.

This plan will be discussed at the central bank’s policy meeting and is anticipated to gain majority support from board members.

Interest Rate Expectations

The Bank of Japan is also expected to maintain its benchmark interest rate at 0.5%. A survey suggests that interest rates will likely remain unchanged through the year-end.

The Bank aims to hold rates while slowing the pace of bond tapering due to market strain.

The Bank of Japan is moving cautiously, with a marked intention to steadily reduce its presence in the government bond market while maintaining short-term stability in interest rates. What this means is that, although the central bank will start scaling down its support, it isn’t pulling away from the market entirely just yet. Instead, it’s taking a measured approach, attempting to avoid unsettling traders and investors who are watching for any misstep that could cause a sharp price reaction. We interpret this behaviour as a finely calibrated attempt to exit extraordinary policy tools without creating disruption in the local debt market.

Kuroda’s successors now find themselves gradually leaning towards a slightly tighter stance, though it’s happening slowly. The expected retention of the 0.5% benchmark rate tells us that inflation and domestic demand likely don’t warrant further tightening, especially while global markets remain cautious. A full withdrawal of support may not be feasible in the short term. Buying of bonds will go on, but in smaller quantities, and not at the levels seen over the past decade.

Market Resilience and Strategy

From our perspective, the planned reduction to around ¥200 billion per quarter represents a meaningful shift in tone. Not what we might call a policy pivot, but a slow walk in that direction. With the scale of purchases set to halve, we can infer that there’s growing confidence within the board regarding market resilience—or at least an intention to test it. The important detail is the timeline. The move beginning in April 2026 gives traders plenty of lead time, which softens immediate volatility risk but increases the importance of pricing long-dated contracts and spreads with greater precision.

Ueda’s team is walking a tightrope—taper liquidity, keep borrowing costs steady, and ensure domestic markets don’t misread these actions as sudden policy retreat. Too fast and you risk shock. Too slow and credibility may weaken. We anticipate this gradual shift will lead to readjustments in bond yield expectations, but not an abrupt swing. As market liquidity narrows over time, the cost of hedging rates exposure may climb incrementally. It’s a scenario we need to prepare for.

From where we stand, every indication is that communication will grow more transparent in the months ahead. That makes forward-guided strategies more viable again. The yield curve should remain relatively anchored for now, with shorter tenors already priced for rate stability and long tenors still showing hesitation regarding the bank’s next move. Using this pattern, relative value strategies can continue to find opportunities in duration-neutral positioning.

In short, traders should interpret the slow winding down of bond buys as a reliable signal of mild tightening pressure that won’t be felt all at once. It’s a question of reading timeline against volume and matching it with volatility inputs. Gearing towards instruments that benefit from reduced intervention—while managing exposure to expectations surrounding policy inertia—might deliver better traction. Watch how appetite shifts in the swap market. That’s where pricing conviction usually firms up first.

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