BoJ holds rates and sets course for QE exit
The Bank of Japan kept its policy rate at 0.5% and announced its exit plan from quantitative easing at Tuesday’s meeting. Following a recent spike in ultra-long JGB yields, the BoJ decided to ease off the pace of reducing JGB purchases in FY2026.
The central bank will maintain the current rate of reducing JGB purchases this year, then halve the pace in FY2026. The central bank’s share of the JGB market at 47% is still significant and is projected to decline only gradually to 39% by Q1 2027.
We retain a more cautious outlook on policy rates than the majority view. A tightening bias is our base case, but we forecast a long pause for the BoJ before it begins raising rates again, unless the US substantially reverses course on trade policy and global trade policy uncertainty declines significantly.
We think the impact of high US tariffs and global trade policy uncertainty on exports and investments will be more significant and long-lasting than the majority view. Although wages are set to continue to rise amid a secular labour shortage this year, consumption will remain lacklustre as real income growth is stagnant due to persistent supply side-driven inflation.
