The turmoil in Japanese government bonds may soon subside! A former official of the Bank of Japan makes a significant prediction: the pace of debt reduction may slow down in the next fiscal year

According to the Zhitong Finance APP, a former executive committee member responsible for the implementation and operation of monetary policy at the Bank of Japan stated that the Bank of Japan is likely to announce a significant slowdown in the pace of its government bond purchase tapering at the upcoming central bank monetary policy committee meeting.

Statistics show that since last summer, the Bank of Japan has reduced its monthly bond purchase scale by up to 400 billion yen (approximately 2.8 billion USD) each quarter. However, as inflation in Japan has continued to rise significantly above the central bank's target of 2% since the beginning of this year, Japanese government bonds have been caught in a wave of selling. With the absence of the Bank of Japan, the strongest purchasing power in the Japanese bond market, the market's yield requirements for long-term Japanese government bonds have been expanding, leading to a continuous surge in Japanese government bond yields, especially for bonds with maturities of 10 years or more, which have recently caused negative ripple effects in the global financial market.

Therefore, the most focused issue in the two-day monetary policy meeting scheduled to end on June 17 is whether the Bank of Japan will continue to maintain this bond purchase tapering pace in the fiscal year 2026 (starting in April 2026).

If the Bank of Japan clearly signals in its post-meeting statement that it will slow down the tapering scale in the next fiscal year or at another time, the "Japanese government bond selling storm" that has been hovering over the financial market recently may come to a calming period, significantly cooling the pessimistic sentiment among market participants regarding the potential for Japanese government bonds to trigger a global market crash.

"The pace of the Bank of Japan's bond purchase reduction may slow to about 200 billion yen per quarter," said former executive committee member Eiji Maeda in an interview on Monday local time. "That's about half of the current pace, and they are expected not to maintain the 400 billion yen speed." Maeda was primarily responsible for the central bank's monetary market execution and operation department before leaving the Bank of Japan.

According to the current plan, the Bank of Japan is moving towards a target of reducing its monthly bond purchase scale to 2.9 trillion yen by early next year. Maeda stated that about a year later, this scale may further decrease to around 2 trillion yen, which is comparable to the bond purchase amount before the Bank of Japan initiated its large-scale easing policy in 2013.

"That will become a reference point," said the former central bank official, who is currently the director of the Chibagin Research Institute. "Moreover, after the increase in volatility in the global financial market, the Bank of Japan has no reason to cling to a reduction scale of up to 400 billion yen, and they are also unclear about what will happen in the future."

The monetary policy committee led by Bank of Japan Governor Kazuo Ueda plans to review the current bond purchase plan up to March 2026 and beyond next week. Traders have recently focused entirely on the pace of the Bank of Japan's quantitative tightening (QT), especially regarding how the bond reduction plan will change in the context of increased volatility in the ultra-long bond market.

"The Bank of Japan is indeed paying attention to ultra-long-term bonds, but they will not intervene rashly unless it directly leads to extreme instability in the global financial market and system," Maeda stated in the interview. "Once the central bank begins to intervene comprehensively, it may fall into an endless game with the market, starting an endless game Earlier this month, informed sources told the media that Bank of Japan policymakers might consider slowing the pace of government bond purchase reductions at the June monetary policy meeting. However, Kazuo Ueda recently hinted that the Bank of Japan will continue to cut the scale of bond purchases, which has drawn significant attention from market participants regarding the upcoming announcement of a new bond purchase reduction blueprint, as well as the timeline and duration of the plan.

Maeda expects that once the monthly bond purchase scale drops to about 2 trillion yen in early 2027, the Bank of Japan will temporarily halt further adjustments to bond purchases to convey the message of "no more reductions" to the market.

The market generally expects the Bank of Japan to maintain the benchmark interest rate at 0.5% next week. Maeda stated that the timing of the next interest rate hike by the Bank of Japan will depend on U.S. President Donald Trump's tariff measures and their economic impact, as well as trade negotiations with the Japanese government.

He added that if there are no significant shocks, the next rate hike could potentially occur this fall. Statistics confirmed on Monday showed that Japan's GDP contracted in the first quarter, but the decline was smaller than initially estimated, which also supports the cautious stance of the Bank of Japan.

"October may be the earliest point," Maeda said. "But if the Bank of Japan wants to have full confidence in next spring's wage negotiations, it may wait until March next year."

After the next interest rate adjustment, the Bank of Japan is likely to raise rates every six months, targeting a terminal rate of around 1.5% to 2%, higher than the market's general expectation of 1%, Maeda stated in an interview.

Japan's core inflation indicator has been at or above the Bank of Japan's 2% target for three consecutive years (as of April), and current inflation is the highest among the G7 countries. Maeda believes that the Bank of Japan has fallen somewhat behind the curve, but the recent uncertainty brought about by tariff policies has temporarily provided important reasons for it to remain on hold.

"The Bank of Japan must be very cautious," Maeda said. "When the economic outlook is cloudy, they should not rush to normalize policy, but at the same time, they should also avoid the risk of falling behind the curve."