Bank of Japan Needs to Accelerate Tapering

By Makiko Yamazaki and Miho Uranaka

TOKYO (Reuters) – The Bank of Japan (BOJ) should increase the speed of tapering government bond purchases, as a possible pause in interest rate hikes grants the central bank more flexibility in adjusting its tapering plan, according to Kenya Koshimizu, co-head of Mizuho Financial Group’s global markets division.

Koshimizu’s comments come ahead of the BOJ’s review of its existing bond tapering strategy planned for June. As major market players like Mizuho influence this upcoming review, the BOJ’s reduced presence in the debt market raises the expectation that private banks will step in as significant buyers of Japanese government bonds (JGBs).

In an interview on Friday, Koshimizu pointed out that the tapering pace was very moderate last year due to fears of sudden spikes in bond yields alongside interest rate hikes. However, with increased uncertainties regarding U.S. policies and the global economy, the BOJ is likely to have more leeway to adjust its tapering strategy.

Koshimizu mentioned that the BOJ’s current quantitative tightening (QT) program, initiated last year, involves reducing bond purchases by approximately 400 billion yen per quarter, with the aim of lowering monthly purchases to 3 trillion yen by March 2026.

While he refrained from specifying an appropriate pace of reduction, Koshimizu emphasized the necessity of focusing on reinstating the functionality of Japan’s bond markets during a period of global market volatility, driven by significant shifts in U.S. policies.

The BOJ holds about half of the outstanding JGBs, which impacts market liquidity and price discovery. Koshimizu stated that Mizuho’s decision to buy JGBs would be contingent on the circumstances.

Additionally, he hinted at the possibility of investing in U.S. Treasuries after mitigating risk exposure in recent years, noting that global economic uncertainties enhance the desirability of highly liquid products. In the long run, Koshimizu expressed his confidence in Japan’s economic prospects, attributing the shift from deflation to an increased focus on growth by Japanese firms.