What is the impact of the Bank of Japan’s reduction in government bond purchases? Fixed-rate mortgage and corporate lending rates may rise

What is the impact of the Bank of Japan’s reduction in government bond purchases? Fixed-rate mortgage and corporate lending rates may rise
Bank of Japan Head Office

At its monetary policy meeting on the 31st, the Bank of Japan decided on a plan to gradually reduce the amount of its large-scale purchases of long-term government bonds, which began in April 2013 under former Governor Haruhiko Kuroda, from around 6 trillion yen per month to around 3 trillion yen in the January-March period of 2026. This article summarizes the current state of the Bank of Japan’s government bond holdings and the impact of the reduction in purchases on the market in a Q&A format.

Q: Why does the Bank of Japan purchase government bonds?

A: The Bank of Japan is purchasing government bonds held by banks and other financial institutions from the market, increasing the amount of funds supplied to the market, with the aim of stimulating the economy. Initially, the large-scale monetary easing set the pace of increase in the balance of government bonds held at around 50 trillion yen per year, but further easing in October 2014 expanded this to around 80 trillion yen per year. In response to the spread of the new coronavirus, this was changed to “any amount necessary without setting an upper limit” in April 2020.

Q: Why was the reduction made?

A: The Bank of Japan’s outstanding holdings of government bonds stood at approximately 589 trillion yen as of the end of March this year, accounting for 53.2% of the total outstanding balance. It had been pointed out that the Bank of Japan’s excessive holdings of government bonds had led to low liquidity of government bonds and a decline in the market’s ability to determine bond prices and interest rates. There was also a view that fiscal discipline had been lost because the Bank of Japan ultimately purchases the majority of government bonds issued by the government.

Q: What will happen if we reduce government bond purchases?

A: As a result, the demand for government bonds in the market will decrease, and the price of government bonds will fall (long-term interest rates will rise). This will lead to an increase in fixed mortgage interest rates and lending rates for companies, which are linked to long-term interest rates. Economic activity by households and companies may stagnate, which could have a negative impact on the economy.

Q: What is your current purchase amount?

A: When the Bank of Japan lifted its negative interest rate policy in March this year, it announced a policy to purchase government bonds at around 6 trillion yen per month. This was said to be roughly the same as the redemption amount of government bonds that would be refinanced as they matured, and the Bank of Japan’s government bond holdings remained flat, neither increasing nor decreasing. (Takehiko Nagata)

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Source: Japanese