Bank of Japan Considering Government Bond Reduction, Potentially Starts Quantitative Tightening

According to reports from Japanese media on Understanding of foreign exchange tradingThursday, the Bank of Japan is considering implementing a new measure to reduce its purchase of Japanese government bonds, potentially marking the Bank of Japan's entrance into a new phase of quantitative tightening. This move aims to decrease the number of government bonds held by the Bank of Japan, thereby adjusting its monetary policy.

This news comes as the Bank of Japan is in the midst of a two-day policy meeting, which is significant as it is the first policy meeting held by the Bank of Japan since March of this year. During the meeting in March, the Bank of Japan announced an increase in the benchmark interest rate from -0.1% to 0-0.1%, ending its long-standing negative interest rate policy of 17 years. Furthermore, the Bank of Japan discontinued its Yield Curve Control (YCC) policy, but stated it would continue to purchase Japanese government bonds at roughly the same scale, and it cancelled its purchase plans for Japanese stock ETFs and REITs (Real Estate Investment Trusts).

Meanwhile, the yen fell below the significant threshold of 155 against the dollar this week, raising concerns about the Japanese economy. This trend has put the Bank of Japan in a more complex situation. Market analysts broadly believe, considering the risk of rising inflation, that the Bank of Japan might signal a hawkish stance at this meeting. If the Bank of Japan maintains a dovish stance, the yen could continue to decline.

U.S. Treasury Secretary Yellen has expressed her views on the actions Japan might take. She noted that major countries should only intervene in currency markets in extreme situations, and such interventions should be rare and preceded by consultations.

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