The Bank of Japan (BOJ) is set to raise its benchmark interest rate by 0.25 percentage points from the current 0.75% to 1.0% at its monetary policy meeting on June 15-16, according to reports. The BOJ has also begun adjusting its plan to halt the quarterly reduction of bond purchases after April 2027.
According to the Nihon Keizai Shimbun (Nikkei) on Monday, the BOJ executive, led by Governor Kazuo Ueda, plans to propose a rate hike at the June 16 meeting, which is expected to pass with majority support among the nine policy board members. The proposal to halt the reduction of bond purchases is also gaining majority support among policy board members, with discussions underway with the government.
Earlier, Governor Ueda hinted at the possibility of raising rates this month during a lecture on June 3, saying, "Even amid the uncertain Middle East situation, we need to firmly discuss the appropriateness of a rate hike."
If this rate hike is decided, it would be the first increase in about six months since December 2025. Once the policy rate reaches 1.0%, it would be the highest level in about 31 years since 1995.
Within the BOJ, there is growing concern that rising oil prices stemming from worsening Middle East tensions could push up prices across various items, raising even the underlying inflation rate that excludes temporary factors. The BOJ's benchmark consumer price index (CPI), calculated by excluding the effects of price measures such as government electricity and gas subsidies, rose 2.8% in April, a wider increase than the 2.5% in March.
"The pace at which companies are passing on prices is accelerating," a BOJ official said. "If we miss the right time to respond, there is a possibility that we will have to carry out a larger rate hike later."
The Nikkei reported, "Under the judgment that downside economic risks from worsening Middle East tensions are currently limited, the view that responding to inflation risks should take priority over economic slowdown risks is gaining traction within the BOJ."
Under its current plan, the BOJ intends to reduce its bond purchases by 200 billion yen (about 1.896 trillion won) each quarter through January-March 2027. From April 2027 onward, it is considering halting the reduction and maintaining bond purchases of 2.1 trillion yen (about 19.9086 trillion won) per month.
The BOJ has purchased large amounts of long-term government bonds during its large-scale monetary easing policy implemented since 2013. As a result, the proportion of government bonds held by the BOJ in Japan's bond market expanded to about 54% at its peak in 2023.
However, as the BOJ's market influence grew excessively, assessments emerged that the price-formation function through investor trading had weakened. Accordingly, the bank has been gradually reducing the scale of its bond purchases since August 2024.
The Nikkei explained, "The bond market has recently seen increased volatility due to inflation concerns stemming from Middle East instability and wariness over fiscal expansion. In May, the yield on newly issued 10-year government bonds, a representative indicator of long-term interest rates, temporarily reached the 2.8% range, rising to the highest level in about 29 and a half years."
The BOJ assesses that its reduction of bond purchases so far has promoted market-driven interest rate formation and improved market functions. However, the increasing number of cases of growing bond market instability—such as the temporary surge in interest rates since 2025—is also cited as a burden.
Halting the reduction of bond purchases is expected to ease concerns over worsening supply and demand, helping stabilize the market. On the other hand, considering the redemption of maturing bonds purchased in the past, the BOJ's outstanding bond holdings are expected to continue declining, so the overall trajectory toward monetary policy normalization is likely to be maintained.
The BOJ plans to seek ways to balance two goals: restoring bond market functions and stabilizing the market.
However, some within financial markets and the BOJ argue that the reduction of bond purchases should continue beyond next spring to reduce the BOJ's bond holdings more quickly. The BOJ plans to closely review market conditions until just before the monetary policy meeting before making a final decision on whether to halt the reduction of bond purchases.
