The Bank of Japan is reportedly thinking about making smaller cuts to its bond purchases. The discussions are focused on reducing these purchases by 200 billion to 400 billion yen each quarter. The updated bond-buying plan is likely to continue until March 2027. This method could negatively affect the yen since the Bank may buy more bonds than previously expected as part of its gradual reduction plan. This clearly shows that the Bank is not aggressively trying to reduce its monetary support. Cutting bond purchases by just 200 to 400 billion yen each quarter is a much slower pace than what many expected. This gentler approach seems aimed at avoiding shocks in the financial markets, especially during a time when inflation and global interest rate differences are putting downward pressure on the local currency. By tapering slowly, the Bank is keeping some support in place, making small adjustments without pulling back too quickly. Since the new timeline extends to March 2027, it is becoming less likely that there will be a significant shift to stricter policies soon. Ongoing easy conditions will likely lower yields and keep the yen weak compared to currencies with tighter policies. This situation could make it harder to justify long positions on the yen if interest rates between countries continue to widen. Ueda, who is expected to oversee policies during this extended period, may not feel pressured to speed up the reduction. Instead, by sticking to a mild reduction plan and maintaining predictability, the recent decisions indicate an aim to avoid disrupting the markets until global volatility settles down. For those tracking short-term price changes or market reactions to economic events, it’s clear that gradual changes will have an impact. These aren’t just theoretical ideas—they relate directly to lower interest rate expectations and movements in fixed income markets. Given the current guidance, the impact on speculative trading is significant. Carry trades that rely heavily on yield spreads will likely continue to push down the yen and raise demand for volatility protection ahead of major central bank announcements. While many in the policy sphere are considering exit strategies, this staged reduction plan shows we are still far from a monetary environment where support for yields will disappear. Traders with short positions on the yen or those tied to Japanese rates may continue to face risks leaning toward further weakness—especially if energy import costs keep rising, which could add to the pressure on already low real returns. At this point, it’s essential to closely monitor how capital flows change, especially with the fiscal year-end and tax-selling periods approaching. While interventions are possible, none have occurred yet, even with the yen trading at multi-decade lows—sending another subtle signal. Market volumes are important. The effectiveness of these policies will depend on participation and the persistence of low rates serving as a foundation. In the coming weeks, we recommend being cautious about betting on yen reversals or assuming that tapering will lead to a significant recovery in yields. The data, particularly regarding wage growth and core inflation, will likely be more relevant than short-term market sentiment. As interest rate differentials grow, there may be more interest in funding strategies that take advantage of the central bank’s trajectory. Pay attention to bond maturities. The focus on longer-dated bond purchases suggests a strategy to reduce volatility along the curve, where duration risks become important again. This could also be beneficial for portfolios with exposure to Japanese debt from a mark-to-market perspective. The market’s reaction, especially in the options area, is expected to be steady but not stagnant. Adjustments may happen in pricing models that were based on a faster taper, leading to potential repricing in those quarters. Watch for changes in demand for hedging against yen sensitivity as these positions are reviewed. We will keep monitoring these timelines and adjustments, recognizing that the expected tightening from the central bank may now extend further than many anticipated at the beginning of the year.

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