Insights 
VT 
The Bank of Japan is being urged to maintain or ease its bond purchase tapering plans beyond fiscal 2026. This is due to recent volatility in super-long Japanese government bond yields and a decrease in demand. Concerns have been raised in meetings held in May, where many suggested keeping or only slightly reducing bond purchases.
The BOJ intends to halve its monthly bond purchases to ¥3 trillion by March 2026. Some argue for cutting purchases to ¥1–2 trillion per month, while others propose maintaining the current pace or pausing reductions for super-long bonds due to liquidity concerns. This variety in suggestions indicates the challenge the BOJ faces, and it will review its strategy at the June 16–17 policy meeting.
Calls for More Flexibility
At the meeting, there were calls for more flexibility, particularly for super-long bonds. Some cautioned against changes in response to market structure shifts, as weak demand might limit the BOJ’s ability to control volatility. Even after ending negative interest rates and beginning a slow taper, the BOJ still holds nearly half of all outstanding JGBs, trailing behind other global economies in reducing crisis-era stimulus.
In essence, the piece outlines recent tensions related to the Japanese central bank’s current approach to government bond purchases. With yields on longer-dated debt turning erratic and buyers proving hesitant, a number of internal and external voices are nudging the authorities to slow or even stop their previous plan to scale down support. The original timeline aimed at cutting monthly purchases in half by the end of fiscal 2026. But subdued appetite, particularly for bonds with longer maturities, has raised alarm among policymakers as well as market observers. The review due on 16–17 June will be pivotal in deciding whether to stay the course or adjust it.
Some members at recent policy gatherings have advocated for a more cautious path, pointing out the thinner demand and latent fragility in market functioning. Risk of disorderly pricing has also crept into their considerations. These concerns are not hypothetical: yields on the super-long end of the curve have recently swung wider than is typical. The main worry here is less about long-term inflation or growth — and more about illiquidity and warped trading dynamics.
In recent weeks, we’ve observed yield gaps widening more than usual during quieter hours. That alone hints at a drop in depth and resilience. While a slight scaling back may work in shorter durations, for the longer ones the central bank could do well to delay those steps. Flexibility in the pace of tapering can improve transmission and avoid dislocations, especially when sentiment is still uneven and investor flows remain one-directional.
Considering Market Constraints
Given the scale of bond holdings already on the balance sheet — close to half of all outstanding issuance — the broader market can still feel over-reliant on a single anchor. That places constraints on traders and reduces the usual range of exit ramps. The result could be more frequent pullbacks in liquidity, particularly in off-the-run issues or longer maturities, which carry more convexity risk.
From our side, pricing in early taper reduction on the super-long end may be premature. The volatility we’ve tracked around the 20- and 30-year regions suggests that supply isn’t fully digesting yet. Should the authorities slow reductions or pause them temporarily, it would make sense to shift strategy accordingly. Risk should be marked with tighter stops in those maturities, and breakevens adjusted for slippage wider than ±6 basis points intraday. Market depth metrics we’ve reviewed have not yet returned to pre-pandemic norms.
One of the tougher parts now lies in anticipating policy shifts that are themselves reactive to illiquidity — a feedback loop that’s both plausible and tricky. Bond auctions for longer tenors could underperform without signalling from the central bank. The better approach for now is to stick to the belly where price discovery is fairer and the floating base still absorbs decent demand.
Also worth flagging: recent basis moves in swaps make it clear that forward curves may not be reliable proxies for conviction. The divergence between physical and synthetic pricing is small but persistent, and it creates noise around actual expectations. That weakens one’s ability to hedge taper signals by simply chasing futures or swap spreads.
Looking at the bigger picture, sequencing matters. If support is withdrawn too soon and demand still lags, disorderly moves may follow. That’s what needs to be avoided. Better to wait with a clearer read on capital reallocation before tightening liquidity further in an already thin part of the curve. We’ll be tracking changes in auction tails and bid-to-covers closely over the next two cycles. If those slip considerably, we expect spreads to widen vis-à-vis Europe rather than contract.
