MNI POLICY: BOJ To Eye JGB Buying Cut To Lower Balance Sheet

The Bank of Japan will need to reduce its quarterly pace of JGB purchases by either JPY200 billion or JPY100 billion in or after the first quarter of 2027 in order to continue shrinking its balance sheet, with a decision likely to be made at the June 15-16 meeting, MNI understands.

The BOJ has deliberately shifted the focus of its communication from balance sheet reduction to the pace of JGB buying cuts, at a time when Japan’s fiscal policy is becoming more expansionary. 

If it were to suspend further reductions at its June interim assessment – which will cover the JGB purchase plan for FY2027 – the BOJ thinks that markets would be likely to interpret that as assisting expanded borrowing under new Prime Minister Sanae Takaichi. (See MNI POLICY: BOJ Sees Hikes Intact, Despite Takaichi Win)

In June 2025, the BOJ decided to slow monthly JGB purchases to JPY2.1 trillion by the first quarter of 2027, from JPY2.9 trillion a year earlier. As a result, its JGB holdings are projected to decline to about JPY490 trillion by end-March 2027 from JPY530 trillion a year earlier.

JGB STRATEGY

Redemptions are estimated at around JPY74 trillion in fiscal 2026 and JPY73 trillion in fiscal 2027. Maintaining a quarterly JPY200 billion reduction in purchases through fiscal 2027 would lower monthly buying to JPY1.9 trillion in April–June 2027 and JPY1.3 trillion by January–March 2028, implying a roughly JPY55 trillion annual decline in holdings. Continuing that pace would reduce net purchases to zero in fiscal 2029, given redemptions.

If the BOJ pauses reductions and maintains JPY2.1 trillion in monthly buying, holdings would still fall by about JPY47 trillion, broadly in line with fiscal 2026’s pace. With redemptions expected to moderate over time, balance sheet contraction would gradually slow.

Attention is likely to increasingly focus on whether the BOJ will be prompted to conduct emergency bond buying to counter sharp yield rises and whether it will halt reductions in long-term holdings. (See MNI POLICY: BOJ Sees Little Chance Of JGB Intervention) 

A further issue is how and when it shifts its framework for excess reserves toward an “ample” regime from its current hands-off approach, though that discussion is still far away and officials are instead monitoring upward pressure on the unsecured overnight call rate as reserves decline.