Japanese Bond Market Navigates Post-Intervention Era

As long-term interest rates continue to rise steadily, investors in Japan's government bond market are adapting to a reduced interventionary role by the Bank of Japan (BOJ).

Central Bank's Stance

Despite the recent bond yield increases, BOJ Governor Kazuo Ueda has maintained the bank's commitment to allowing market forces to determine long-term rates. While issuing a mild warning about potential bond buying increases in case of "abnormal" market movements, Ueda emphasized the BOJ's unwavering stance.

High Threshold for Intervention

Sources familiar with the bank's thinking have indicated an extremely high threshold for emergency bond buying operations, reserving them for exceptional cases of abrupt and sustained yield spikes.

Steady Yield Growth

Japanese government bond yields (JGBs) have witnessed a steady rise since October 2022, initially driven by U.S. Treasury yields. The BOJ's short-term rate hike to 0.5% in January and robust domestic economic data have accelerated this upward trend.

Market's Outlook

Market players predict that the benchmark 10-year yield could reach 1.5% in the coming weeks, despite Ueda's remarks. Economists anticipate at least one more rate hike this year, with some investors betting on a higher probability of two increases.

Central Bank's Comfort

BOJ Governor Ueda's recent comments, along with previous statements from board member Hajime Takata, suggest that policymakers are comfortable with the current yield movements, viewing them as reflections of an improving economy.

Shift from Past Intervention

The BOJ's reduced intervention in the bond market represents a significant shift from its past practice of aggressive yield curve control under former Governor Haruhiko Kuroda. This change highlights the central bank's focus on weaning the economy off excessive monetary support.

Phase-Out of Bond Buying

Reversing substantial bond purchases would be hindered by the BOJ's ongoing efforts to phase out its massive stimulus. The bank is gradually tapering its monthly purchases, aiming to reduce them to 3 trillion yen by March 2026.

Impact on Balance Sheet Reduction

Despite the current tapering pace, it is estimated that it will take approximately seven years for the BOJ to halve its 585-trillion-yen bond holdings. The central bank's primary objective remains reducing its vast bond holdings.

External Factors

While internal discussions on future tapering plans are yet to commence, the pace of bond yield increases could influence the BOJ's strategy beyond April 2026. U.S. President Donald Trump's auto tariff threats may also provide relief in the form of lower yields due to concerns about economic slowdown.