BoJ preview: Policy path vs. rhetoric

Research evidence excerpt

BoJ preview: Policy path vs. rhetoric

prise. With no Outlook Report scheduled for this meeting, market focus will likely

center on two key issues: (1) the policy rate path beyond 1%, and (2) the framework for

JGB purchase operations from April 2027 onward.

The rise in 10‑year BEI amid escalating Middle East tensions, alongside the steepening

of the 2s10s curve, suggested that markets had priced in an increased risk of the BoJ

falling behind the curve. Since then, however, 10‑year JGB yields have declined, as the

upward pressure on rates has moderated alongside easing Middle East tensions.

Although Middle East tensions have eased, USD/JPY trading above 160 raises the risk

that Deputy Governor Uchida may adopt a more hawkish tone at the press conference,

potentially signaling an acceleration in the pace of rate hikes. Against this backdrop, we

favor long JP 6m2y atm payers financed with short KR 6m2y payers (see Rates Vol

Watch: KR vol – Long JP vs KR frontend payers 2026-06-08).

On JGB purchase reductions, the prevailing market consensus is that the current tapering

plan will be maintained through January–March 2027. Beyond April 2027, however, views

diverge on whether reductions will continue or be paused.

Given that (A) continuing JGB purchase reductions in the absence of a clear market

consensus risks being perceived as a hawkish surprise, and (B) even under a pause

scenario the BoJ’s balance sheet would still be set to contract at the fastest pace among

major central banks, we expect the BoJ to halt JGB purchase reductions from April 2027

onward. Under this scenario, the market impact is likely to be limited (see Liquid Insight:

BoJ to maintain JGB purchase reduction plan; BS to keep shrinking 2026-05-26).

- Tomonobu Yamashita, Rates strategist