BoJ to slow pace of bond taper in 2026 as fresh risks emerge

The Bank of Japan (BOJ) kept interest rates steady on Tuesday and decided to decelerate the pace of its balance sheet drawdown next year, signalling its preference to move cautiously in removing remnants of its massive, decade-long stimulus.

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The decision came as the escalating Middle East conflict and US tariffs complicate the BOJ's task of raising still-low interest rates and reducing a balance sheet that has ballooned to roughly the size of Japan's economy.

"For the time being, there is extremely high uncertainty over each country's trade policy," BOJ Governor Kazuo Ueda said at a press briefing after the meeting.

"As such, there is bigger downside risk for both Japan's economy and prices."

Markets are focusing on how Ueda balances US tariff risks and domestic inflationary pressure for clues on how soon the central bank could resume interest rate hikes.

In a widely expected move, the BOJ maintained short-term interest rates at 0.5% by a unanimous vote at its two-day policy meeting that ended on Tuesday.

The central bank also made no changes to an existing bond tapering plan, under which it will reduce government bond purchases by 400 billion yen ($2.76 billion) per quarter so that monthly buying slows to around 3 trillion yen by March 2026.

However, in an extended quantitative tightening (QT) plan decided on Tuesday, the BOJ will halve the quarterly reduction amount from fiscal 2026 so that monthly purchases fall to around 2 trillion yen by March 2027. That pace aligns with requests the BOJ received from several market players in meetings last month.