Analysis-BOJ could temper its taper as bond wobbles rattle markets

By Leika Kihara

Tue, May 19, 2026 at 3:45 AM EDT 5 min read

By Leika Kihara

TOKYO, May 19 (Reuters) - Financial market turbulence could force the Bank of Japan to go slow on the unwinding of its massive debt holdings, giving anxious bond investors some relief as surging yields lay bare worsening fiscal strains and inflation pressures.

The central bank sets a high bar for outright bond market intervention, said three sources familiar with the BOJ's ‌thinking, but it could flag a slowdown or pause in its so-called quantitative tightening plans for next fiscal year if conditions demand it.

A reduction in the BOJ's holdings, currently at around 500 ‌trillion yen ($3.14 trillion), has been in train since 2024 under Governor Kazuo Ueda as part of efforts to normalise monetary policy after decades of ultra-low interest rates.

The BOJ is widely expected to lift interest rates at its June 15-16 meeting to curb hot inflation but, in ​a nod to an increasingly uncertain global environment, might signal a less aggressive tapering of bond purchases.

While no decision has been made yet on the exact pace of tapering, the BOJ sees little need to rush in reducing its huge balance sheet in times of market stress, they said.

"The BOJ's bond holdings have decreased quite a bit, so there could be a case to pause its taper to provide sufficient liquidity," one of the sources said.

"A slowdown or pause in taper won't be ruled out, especially if markets remain jittery," another source said, a view echoed by a third source. The sources spoke on condition of anonymity as they were not authorised to comment publicly.

The BOJ will ‌review its bond taper plan running through March next year and lay out ⁠a new plan for fiscal 2027 at the June policy meeting.

The BOJ has collected surveys from bond investors and will hold two-day meetings with them from Thursday to sound out their views on the preferred pace of bond buying. The outcome will have huge sway on its final decision on the taper plan.

The decision will test Ueda's ⁠resolve in pushing through a slow but steady withdrawal of a decade-long, massive stimulus that began in 2024.

The BOJ will likely stick to its taper plan through March next year and sees little need for now to conduct emergency bond buying operations - a tool it sets aside to deal with "rapid rises in long-term interest rates," the sources said.

There is little reason to intervene when yields are moving reflecting fundamentals such as investors' views on fiscal and monetary policy, a sign of proper ​market ​functioning, they said.

Bond market intervention could also prove costly by exposing the BOJ's line in the sand and force it to ​defend the level with huge buying, analysts say.