The Bank of Japan (BOJ) will reduce its purchases of super-long Japanese Government Bonds (JGBs) for the first time as part of its quantitative tightening (QT) plan. April to June bond buying will decrease by ¥395 billion, bringing total purchases to ¥4.105 trillion.
Specifically, the BOJ will cut 10–25 year bond purchases to ¥405 billion/month, and under one-year bonds to ¥100 billion/month, with each other maturity down by ¥100 billion/month. This decision stems from concerns regarding weak demand in long-term bonds.
Shift In Bond Market Strategy
The BOJ aims to halve monthly bond purchases to ¥3 trillion by March 2026, with a full QT plan update expected in June. Since 2023, the BOJ has ended negative rates and increased the short-term rate to 0.5% in January 2025, while still holding about 50% of all JGBs.
QT generally tightens monetary conditions by reducing liquidity, which can lead to higher yields, making a country’s assets more appealing and potentially boosting its currency. However, if QT adversely affects growth, it could have the opposite effect.
Japan’s shift from ultra-loose policy is notable, as the BOJ’s current bond ownership is comparable to the nation’s GDP. The gradual tapering may yield limited short-term effects on the yen’s attractiveness relative to other currencies.
Monitoring the June BOJ review could be key; potential hints at accelerated QT or rate increases could strengthen the yen further. Additionally, inflation trends will play a role in future BOJ decisions and yen support.
Implications For Yield Curve And Market Volatility
What we can gather from the recent shift at the Bank of Japan is quite clear. There’s a move underway away from extremely accommodative policy—that’s not new—but this latest adjustment provides a sharper sense of direction. The cutback in purchases of longer-dated government bonds is more than an administrative tweak. It’s a message.
Ueda, who leads the central bank, has signalled that there’s less willingness now to support the long end of the yield curve. Super-long bonds—those extending beyond ten years—had been a reliable point of intervention. That support is now softening, which carries several implications depending on which side of the market you’re trading.
For us, what matters most is how this reduction in bond purchases shifts expectations. Yields on longer maturities will likely rise further in response, unless demand from private domestic investors or foreign funds comes to replace the central bank’s usual role. That feels less likely given current risk assumptions and shifting return profiles globally, especially with US and European yields already pricing in tighter financial conditions.
The official view notes weak demand in long bonds. That should not be underestimated. A shrinking appetite for these longer tenors could lead to sharper yield spikes on weaker auction coverage or any perception of under-subscription. For those managing interest rate swaps or positioning in rate futures, this increases the risk of volatility around primary issuance dates and policy announcements.
Reports show that holdings remain around the half-way mark of Japan’s total bond market. That scale itself limits how quickly the bank can exit without stress. But we shouldn’t assume a static pace. If inflation data surprises persistently on the upside between now and July, we would not rule out a faster tapering schedule announced in June. That scenario could trigger a more immediate response in rates markets, especially near the belly of the curve.
The yen’s appreciation may not be immediate, but the direction of travel is becoming more data-dependent. Sharp inflation surprises or wage growth revisions are where we need to focus our attention, particularly in light of the central bank’s new tolerance for slight tightening. The room for upward rate tweaks has quietly opened.
From a trading perspective, the steeper curve could be sustained, but it’ll depend heavily on global positioning too. If US Treasuries begin a corrective pullback, we see scope for relative outperformance in yen rates, which might also encourage carry trades to unwind. We’re planning for wider ranges and less orderly price action in derivatives tied to JGBs as the supply-demand dynamics adjust month by month.
Until the June meeting clarifies the ultimate trajectory, we expect market participants to lean into short-duration trades, or seek convexity through options. Meanwhile, the chances of policy surprise have edged up slightly; not enormous, but enough to nudge implied volatilities higher. Worth noting that in recent months, even slight increases in the short-term policy rate had measurable effects on volatility term structures.
We’ll need to keep a particularly close eye on auction results over the next several weeks. This is where we may first see market stress emerge if support fails to materialise. We’re marking time spreads and liquidity measures for early signs of dislocation; these would prompt faster positioning adjustments across levered market participants.
Inflation, salary negotiations, and the central bank’s language at press conferences will drive our view heading into June. We’re not expecting verbal interventions unless conditions tighten too quickly, but that can’t be dismissed outright. For now, scalping rate moves around issuance and playing volatility through structured products seem more attractive strategies than directional bets.
