Reduced JGB purchases lift long-term yields by 25 basis points
The Bank of Japan's tapering of Japanese government bond purchases has pushed up long-term interest rates by approximately 25 basis points since summer 2024. According to a new BOJ review, market functioning has improved as private investors absorbed 95 trillion yen in government debt.
Quantifying the term premium shift
The Bank of Japan has systematically scaled back its monthly purchase amount of Japanese government bonds from nearly 6 trillion yen in mid-2024 toward a target of 2 trillion yen by March 2027.
A quantitative assessment shows that this tapering has exerted only a modest upward impact on long-term interest rates.
The waning stock effect—driven by the central bank's reduced share of outstanding debt—contributed roughly 10 basis points to the rise in 10-year yields.
Adding the flow effect from reduced secondary market purchases brings the total cumulative increase to about 25 basis points.
Higher underlying inflation expectations and expected short-term policy rate hikes accounted for the remainder of the overall yield increase into the upper 2 percent range.
Investors step into the breach
Market functioning has steadily recovered as the central bank reduced its footprint across on-the-run and off-the-run issues.
Yield curve distortions in the 7-to-10-year sector have largely dissipated, while cash trading volumes expanded.
Between June 2024 and March 2026, private investors increased their bond holdings by 95 trillion yen as BOJ holdings declined by 49 trillion yen.
Domestic depository institutions absorbed 36 trillion yen, overseas buyers added 27 trillion yen, and pension funds acquired 20 trillion yen, though portfolio adjustments will take time.
A controlled retreat, not a revolution
The study confirms that quantitative tightening can occur without causing acute market disruption.
Yet relying on foreign capital leaves Japanese yields exposed to global spillovers as local banks hesitate.
The BOJ's gradual approach successfully restores price discovery while avoiding financial instability.