The Bank of Japan announced on Friday that it would start reducing its government bond purchases in a plan to reduce its nearly $5 trillion balance sheet next month, taking another step toward reducing its large monetary stimulus.
While it will proceed with buying government bonds at the current pace of roughly 6 trillion yen ($38 billion) per month for now, the central bank decided to outline its plan to reduce buying for the next 1-2 years in its July meeting.
Markets widely anticipated the Bank of Japan’s plan to slow bond purchases. However, investors saw the lack of details as an indication that the central bank will be cautious in adjusting monetary policy going forward. This dovish stance impacted the yen and Japanese bond yields, which saw a decline after the announcement.
During the meeting, Japan’s central bank also kept the short-term policy rate target in a range of 0-0.1 percent by a unanimous vote.
The Bank of Japan exited negative interest rates and bond yield control in March 2024 in a historic shift away from a decade-long, radical stimulus program. It has also signaled that it will keep raising short-term rates to levels that will keep the economy stable.
Read: Japan’s economy contracts by 1.8 percent in Q1 2024, slightly better than expected
Markets now expect the Bank of Japan to raise rates again this year. However, they are divided on the timing. In addition, rate normalization prospects come amidst weak consumption and doubts that robust domestic demand will keep inflation on track to hit its 2 percent target.
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