BoJ reverses course and halts plan to calm market panic

The Bank of Japan (BoJ) has made an unexpected shift in its monetary policy. Although it kept interest rates at 0.50%, it announced it would slow the reduction of its bond purchases and reduce the sale of long-term debt, an emergency measure to calm a financial market that was showing signs of panic.

The Bank of Japan (BoJ) was forced to implement an emergency stabilization maneuver this Tuesday, in a clear sign of the fragility lurking at the foundations of the world's fourth-largest economy. Although the key decision to keep interest rates at 0.50% was expected by all analysts, the real headlines lay in the details of its debt management program, where the central bank unexpectedly applied the handbrake.

The "unexpected turn" consists of two coordinated actions to inject calm into a bond market that was on the verge of a crisis of confidence:

* Slowing tapering: The BoJ announced it will slow the pace of reducing its bond purchases (a process known as tapering or quantitative easing) starting in fiscal year 2026. Instead of continuing the quarterly cuts of 400 billion yen, it will halve them.

* Long-term bond issuance cut: In parallel, the Japanese government plans a rare mid-year review to cut sales of "super-long" bonds (20, 30, and 40 years) by 10%.

The reason for this intervention is clear: to calm a panicked market. In recent weeks, yields (the interest paid by the government) on very long-term Japanese bonds had soared to record levels. This occurred because demand for these bonds from traditional buyers, such as insurers, plummeted, creating an imbalance that threatened to spiral into instability.

BoJ Governor Kazuo Ueda was explicit in his justification: "We believe that long-term rates should be fundamentally shaped by the financial market, and it is appropriate for the Bank of Japan to reduce its bond purchases in a flexible and predictable manner that maintains stability in the bond market." Essentially, the central bank feared that withdrawing its support too quickly could lead to "unpredictable consequences."

"If long-term interest rates rise rapidly, the BoJ will respond swiftly, for example by increasing its bond purchases." – Bank of Japan statement.

This decision highlights the difficult crossroads Japan finds itself at. On the one hand, the BoJ has the long-term goal of "normalizing" its monetary policy, that is, abandoning decades of massive stimulus and near-zero interest rates. On the other, the reality of an extremely fragile domestic bond market and a hostile global environment, marked by the "high uncertainty" of the trade war and US tariffs, are preventing it from making progress.

The BoJ is forced to perform a delicate balancing act: attempting to withdraw stimulus with one hand while assuring the market with the other that it will not abandon it. This "dovish tightening" (a softer-than-expected withdrawal of stimulus) is an admission that the Japanese economy has very little room for maneuver and is extremely vulnerable to any external shock.