Bank of Japan set to reduce JGB purchases, stands pat on interest rate

The Bank of Japan kept its benchmark interest rate unchanged on Friday, but indicated it's considering the reduction of its purchase of Japanese government bonds.

The central bank left short-term rates unchanged at between 0% to 0.1% at the end of its two-day policy meeting, as widely expected.

But notably, the bank said in its statement it could reduce its purchases of Japanese government bonds after the next monetary policy meeting, scheduled for July 30 and 31.

The decision was passed with an 8-1 majority vote, with board member Nakamura Toyoaki dissenting.

Toyoaki was in favor of reducing JGB purchases, but is of the view that the BOJ should only decide to reduce them after reassessing developments in economic activity and prices in the July 2024 outlook report, slated for July 31.

Ahead of the next meeting, the BOJ said it will collect views from market participants and will decide on a detailed plan for the reduction of its purchase amount for the next one to two years.

Purchases of JGBs, commercial paper and corporate bonds will also continue as decided in the March monetary policy meeting.

Following the BOJ decision, the Japanese yen weakened 0.52% to 157.84 against the U.S. dollar, while the yield on 10-year JGB fell 44 basis points to 0.924.

The benchmark Nikkei 225 rose 0.68%, reversing earlier losses, while the Topix was 0.71% higher.

In March, the BOJ raised interest rates for the first time in 17 years — ending the world's last negative rate regime — and scrapped the yield curve control policy in a radical policy move.

However, the central bank said at that time it would continue to purchase JGBs at a pace of about 6 trillion yen ($38.17 billion) per month.

While the large scale purchases of JGBs achieved the effect of stabilizing 10-year JGB yields at around the 1% level, it indirectly put additional downward pressure on the weak yen, according to a note by advisory firm Teneo published on June 13.

On May 8, BOJ governor Kazuo Ueda said the central bank will scrutinize the yen's recent declines in guiding monetary policy, according to a Reuters report.

It came after the yen slipped to a 34-year low, trading at 160 against the dollar in late April, which prompted the BOJ to intervene to prop up the currency.

"Sharp, one-sided yen falls are negative for the economy and therefore undesirable," as it makes it difficult for companies to set business plans, Ueda told parliament.

"If currency volatility affects, or risks affecting, trend inflation, the BOJ must respond with monetary policy," he added.