The Bank of Japan (BOJ) has announced a plan to slowly reduce its outright asset purchases. Right now, it’s cutting about ¥400 billion every quarter, and this will continue until the first quarter of 2026. Then, in the second quarter of 2026, the reduction will drop to about ¥200 billion. By early 2027, the total asset purchases will be nearly ¥2 trillion. The BOJ has also shared details on how these reductions will be organized in terms of maturities for the next quarter. This plan aims to provide a clear timeline for adjusting purchase levels while ensuring market stability. Overall, this plan shows a gradual decrease in the Bank of Japan’s purchases over the next few years. The total volume will be reduced steadily, indicating a move away from their very loose monetary policy. The current pace of about ¥400 billion per quarter will remain for now but will ease to ¥200 billion by mid-2026. By early 2027, total holdings are expected to reach ¥2 trillion. Additionally, the details on maturities show that the central bank wants to maintain stability in fixed income markets. By spreading reductions across different maturities, they aim to avoid sudden changes to yield curves and unnecessary volatility. Governor Nakaso and his team are taking their time with this change. Their gradual approach allows rates to adjust naturally, while still keeping a soft hand in the market. This careful strategy signals long-term risk expectations from an important policy player. For those monitoring cross-asset derivatives, this tightening trend can provide useful insights. Reductions in longer maturities might indicate demand for curve steepeners if long-end pressures rise without matching demand. Short maturities, however, will play a crucial role in shaping forward volatility premiums. If you’re exposed to short-term funding changes, aligning with the BOJ’s approach is important. Volatility traders may appreciate the predictability of this plan, but it doesn’t mean they can be passive. The real question is whether short rate expectations drift away from the guidance. If that happens, actual volatility could rise more quickly than expected. It’s important to keep an eye on this spread. Hirano’s team hasn’t set a strict plan for after 2027. If inflation stabilizes or government issuance changes, there could be adjustments to their strategy. For now, though, this shapes how we see JGBs and hedging themes. There’s no need for dramatic price changes. The slow reduction in the Bank’s acceptance of duration risk may be enough to cause slight shifts in dealer inventory, repo liquidity, and total return positioning. Even a ¥200 billion change, if concentrated in a less liquid part of the curve, can impact deliverable supply on futures. In the coming weeks, focusing on convexity footprints across maturities and refinancing dates will be key. Gradual reductions further out can influence swaptions, and understanding this will help in pricing them more accurately. Remember, the forward guidance combined with this measurable taper means that market pressure will build gradually. However, when it does, it will likely follow clear steps. Pricing this path, rather than just the final outcome, will give you an edge in the next quarter.

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