Reports overnight of the Bank of Japan trimming Japanese Government Bond purchases. In summary ….
BOJ to reduce super-long bond purchases under QT plan:
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First cut to super-long bonds: BOJ will reduce purchases of 10–25-year JGBs for the first time since starting quantitative tightening in 2023.
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Monthly bond buying cut: April–June purchases will drop by ¥395 billion to ¥4.105 trillion.
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Specific reductions:
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10–25 year bonds: down to ¥405 billion/month (from ¥450B).
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<1 year bonds: down to ¥100 billion/month (from ¥150B).
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Other maturities: each cut by ¥100 billion/month.
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Reasoning: A cautious step, reflecting concerns about weak demand in long-term bonds.
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QT progress: BOJ aims to halve monthly bond purchases to ¥3 trillion by March 2026.
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Upcoming review: Full QT plan update expected in June, with next phase starting April 2026.
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Policy shift context:
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BOJ ended negative rates and yield cap in 2023.
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Raised short-term rate to 0.5% in January 2025.
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Still holds ~50% of all JGBs—about ¥600 trillion, near Japan’s GDP.
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All else being equal – which it never is – this is bullish yen. Yeah, I know, yen slipped lower overnight.
And, FWIW, news like this out of Japan that impacts financial markets is often known in Japan well before we get wind of it outside.
Go figure 😉
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In general ….
Why QT tends to be bullish for a currency:
- Reduced liquidity:
QT means the central bank is shrinking its balance sheet—selling bonds or letting them mature without reinvestment. This withdraws money from the financial system, tightening monetary conditions. -
Higher yields:
With the central bank no longer a major buyer of bonds, yields tend to rise. Higher yields make a country’s assets more attractive to global investors, increasing demand for the currency. -
Policy normalization:
QT often happens alongside (or after) rate hikes. It signals that the central bank sees the economy as strong enough to stand on its own—another vote of confidence that can support the currency. -
Investor sentiment:
A central bank moving toward QT is often viewed as being ahead of the curve on inflation, which can boost investor confidence in the currency’s stability and value.
Caveats:
- If QT tightens conditions too much and hurts growth, it can later turn bearish for the currency.
It also depends on what other central banks are doing—relative policy matters in FX. If the BOJ tightens while others ease, that’s more bullish for the yen. If everyone’s tightening, the impact is more muted.
As for Japan:
Ultra-loose starting point
- For years, Japan had negativee interest rates and massive bond-buying under its stimulus program.
The BOJ owns around 50% of all JGBs, and its balance sheet is close to the size of Japan’s entire GDP.
That means any move to tighten—like QT or rate hikes—is a significant shift in policy tone.
QT signals a policy turning point
- The BOJ reducing bond purchases signals Japan is further moving away from ultra-loose policy.
Markets tend to interpret this as bullish for the yen.
- The BOJ is tapering slowly, and interest rates remain low (currently around 0.5%).
This makes the yen’s yield still relatively unattractive compared to currencies like the USD or AUD.
So the bullish impact might be limited or gradual, especially in the near term.
What to watch next:
BOJ’s June review:
- If QT accelerates or rate hikes are hinted, that could give JPY a bigger boost.
Global policy divergence:
- If the Fed or ECB cut rates while BOJ tightens, the yen could strengthen meaningfully.
Inflation trends in Japan:
- If inflation proves sticky and forces the BOJ to keep hiking, expect JPY support.
