The Bank of Japan is reportedly considering smaller cuts to its bond purchasing efforts. Discussions focus on reducing bond purchases by 200 billion to 400 billion yen quarterly.

The updated bond-buying programme is expected to run through to March 2027. This approach could impact the yen negatively, as the Bank may acquire more bonds than earlier anticipated in its tapering plan.

Slow Tapering Approach

What this tells us quite clearly is that the Bank is not moving aggressively to unwind its extraordinary monetary support. Limiting purchase reductions to increments of merely 200 to 400 billion yen each quarter leaves a far slower pace than initially expected. That said, this gentler route seems designed to avoid jolting financial markets, especially during a time when inflation dynamics and global rate differentials are still applying downward pressure on the local currency.

This slower tapering approach means that the institution is effectively maintaining a degree of accommodation, nudging the shift without pulling away the support too fast. Because the updated timeline stretches all the way to March 2027, any substantial shift to a more restrictive stance becomes increasingly unlikely in the near term. That continuation of easy conditions will put a dampener on yields, reinforcing downward momentum for the yen across pairs priced against currencies subject to tighter regimes. It also means longer positions on yen may become increasingly difficult to justify if interest rate differentials continue widening.

Ueda, who now carries the expectation of overseeing policies into much of the newly extended timeframe, may therefore face less pressure in the short term to accelerate the scale-down. Instead, by pursuing a mild reduction schedule and opting for predictability, recent decisions suggest that they are seeking not to rock the boat before global volatility settles.

For us following short-term price action or volatility around macro events, the message is to remain clear on how gradual moves will feed through. These statements aren’t simply theoretical—they translate directly into softened rate expectations and volume displacements within fixed income. Given the current guidance, the implied impact on speculative flows cannot be ignored. Carry trades that depend heavily on yield spreads will remain incentivised. This could sustain yen weakness and increase demand for volatility protection going into key rate announcements by other major central banks.

Focus on Exit Strategies

Some in the wider policy circles remain focused on exit strategies, but judging by this staged reduction schedule, we’re still far from a monetary environment where yield support dries up. Traders exposed to short yen positions or benchmarked to Japanese rates will likely continue seeing asymmetrical risks leaning toward further softening—especially if energy import costs remain sticky and place added pressure on already thin real returns.

At this stage, we should monitor carefully how asymmetric capital flows develop, particularly in light of timing around fiscal year-end activity and tax-selling windows. Interventions won’t be ruled out, but none have materialised despite the currency trading near multi-decade lows—so that sends another implicit signal. Volumes matter. Follow-through from these policies depends on participation and the persistence of low rates as the anchor.

For the next few weeks, we interpret this as a signal to avoid leaning too much on yen reversals or assuming the taper will mean dramatic yield recovery. The data trail, especially wage growth and core inflation pressures, will still guide us more than sentiment-driven hours. And as rate differentials widen, we’re likely to see increased interest in funding strategies that shortcut that central bank’s trajectory.

Keep an eye on maturities. The skew towards longer-dated bond purchases hints at a desire to flatten out volatility along the curve, where expectations around duration risks become central again. That could also be useful from a mark-to-market point of view for portfolios carrying exposure to Japanese debt.

Market reaction, especially in the options space, is likely to be measured but not flat. Skews might adjust slightly, and there may be a drift in pricing models where assumptions built around a faster taper now face adjustment. So, watch for repricing in those quarters, particularly when demand for hedging yen sensitivity could start to filter back into positioning reviews.

We’ll continue tracking these timelines and adjustments with awareness that central bank flexibility, once assumed to be tightening by default, may now stretch well beyond what many planned for at the start of the year.

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