The Bank of Japan (BoJ) announced that it would keep its policy rate unchanged at 0.50% following its June 16–17, 2025 meeting. This marks the third consecutive hold, following decisions in March and May. At the same time, the BoJ unveiled a new plan to scale back its bond purchases. Starting in April 2026, the quarterly pace of reduction will be cut from ¥400 billion to ¥200 billion. The current pace of ¥400 billion per quarter will be maintained until Q1 2026. The continuation of the Quantitative Tightening (QT) program into 2027 will be reassessed during a new policy review scheduled for June 2026.

The decision to hold the policy rate steady while slowing the pace of QT reflects the central bank's cautious stance:

• The BoJ has been influenced by recent volatility in the bond market. It emphasized that the deceleration in QT is intended to improve market functioning: tightening too rapidly could increase volatility and have negative consequences for the economy. However, the central bank retains flexibility and may adjust its operations—such as increasing bond purchases or fixed-rate operations—if yields rise sharply, regardless of the preset schedule.

• A slower QT does not necessarily imply a pause in the rate hike cycle. Governor Ueda reiterated that balance sheet reduction should be considered separately from monetary policy decisions. Since the BoJ’s JGB holdings are concentrated in long-term maturities, a slower pace of QT is expected to primarily affect long-term yields, with limited impact on the short end of the curve. Ueda also stated that a rate hike remains on the table “if high uncertainty does not darken the outlook.”

• The timing of the next rate hike remains uncertain. While the BoJ has not revised its assessment of the economy or price trends at this stage, it placed strong emphasis on the impact of uncertainties, which it described as “greater than in the past.” Any further tightening will depend on the authorities’ “degree of confidence” in the likelihood of achieving the 2% inflation target on a sustained basis. Following the meeting, the BoJ appeared inclined to maintain its “wait and see” approach for longer. The institution believes that inflation expectations are still not firmly anchored at 2%. It is particularly concerned about the potential impact of tariffs on winter bonuses and the upcoming spring wage negotiations.

The BoJ appears cautious in the face of risks stemming from U.S. trade policy. As long as no agreement is reached between Japan and the United States, the current monetary policy stance is expected to be maintained. The overall tone of the meeting also suggests a possible delay in further rate hikes in 2026.

However, due to the recent acceleration in underlying inflation and associated upside risks (strong wage dynamics, resilient domestic demand, expansionary fiscal policy), we maintain our baseline scenario of continued monetary policy normalization by the end of 2025. This includes two additional rate hikes, with a terminal rate of 1.00%. The first opportunity for another rate increase could come at the July 30–31 meeting, following the 90-day pause on “reciprocal” tariffs announced by the United States. That said, the likelihood remains low, as no compromise has been reached so far.