Japan’s BoJ preview: What to expect for a QE exit plan

At the July policy meeting, the Bank of Japan (BoJ) will reveal its plan for reducing JGB purchases over the next one to two years. We project that the BoJ will reduce monthly JGB purchases by ¥0.5trn every quarter, from the current ¥6trn, to impress a “sizeable reduction” on the market, while avoiding a sharp rise in yields by stressing flexibility and predictability.

What you will learn:

• In this case, by end-2025, the BoJ’s monthly purchases will decline to ¥3trn and JGB holdings will drop by 5%. The BoJ’s share in outstanding JGBs will drop to 44% from 48%. The impact on the 10-year yield through the change of the “stock effect” of the BoJ holdings will be less than 10bps.
• We believe the BoJ’s approach will be gradual, flexible, and predictable, and therefore the impact on long-term yields will be manageable. In addition to the projected limited impact from the change of the “stock effect”, domestic savings will limit the increase in yields, especially through JGB purchases by banks.
• We continue to believe that the BoJ will wait until September for the next rate hike, despite the weak yen and market speculation. Data will not be ready to confirm if the strong Spring Negotiation wage settlement effectively raises household incomes and consumption. The BoJ will also want to preserve a rate hike to manage market pressures amid prolonged US dollar strength.