MNI INTERVIEW: BOJ's JGB Reduction Pace Vital - Yamamoto

The Bank of Japan should clearly communicate the pace at which it plans to reduce its JGB holdings, including both purchases and expected redemptions, to help maintain bond market stability, a former senior BOJ official told MNI.

“The BOJ is expected to continue reducing bond purchases by JPY400 billion per quarter through March 2026 – that’s one scenario,” said Kenzo Yamamoto, head of KY Initiative and a former BOJ executive director, noting the Bank’s holdings declined by just JPY14 trillion – a relatively slow pace – between March 2024 and March 2025.

Yamamoto emphasised the need for the BOJ to clarify the pace of reducing its bond holdings, calling for a more “market-friendly” approach in which the Bank publishes both its planned purchases and expected redemptions to help market participants better assess the supply they must absorb.

The BOJ will assess its bond purchase reduction plan at its June 17-18 policy meeting, while Bank officials will meet with JGB market players on May 20-21 to discuss the impact of its operations and evolving bond market moves.

Yamamoto stressed the need for the BOJ to define what it means by “restoring market functioning” and “normalising monetary policy.” The central bank’s large bond holdings continue to suppress JGB yields, making it harder for markets to reflect concerns about Japan’s fiscal sustainability, he warned.

He also reiterated his November call for the BOJ to lower the balance of JGB holdings to around JPY120 trillion, roughly equivalent to the amount of banknotes in circulation, from the JPY577.4 trillion held as of May 10. (See MNI INTERVIEW2: BOJ Should Cut JGBs By JPY470 Trln – Yamamoto)

MOVING TARGET

While Yamamoto expects the BOJ to take a wait-and-see approach to the 0.5% policy rate, given high uncertainty on inflation and economic growth, he believes a hike is possible in the second half should authorities resolve the uncertainties surrounding tariffs “smoothly and favourably.”

Yamamoto also said that the Bank should reconsider its commitment to achieving its 2% inflation target, noting that rising consumer prices have increased the degree of accommodative financial conditions.

“The Bank needs to review if the 2% price target is appropriate, so it will maintain easy policy until the target is achieved,” he added, noting the Japanese public were already suffering from high prices while the BOJ failed to act.

The central bank’s emphasis on a wage-price virtuous cycle is also misplaced, as real wages remain negative, he argued. He also expressed doubt that wage hikes can be sustained next year, given current economic and financial conditions, noting manufacturers' profits are traditionally affected by the forex rate.

"In addition to exports, profits at overseas affiliated firms in terms of the yen play a big role of boosting corporate profits,” he continued. “Labour productivity per worker will likely fall, which in turn will put downward pressure on wage hikes next year.”