The Bank of Japan will consider slowing reductions in its bond purchases next year under a quantitative tightening (QT) plan due on Tuesday, as the bank focuses on avoiding big market disruptions amid growing economic uncertainties.
Those deliberations come as the BOJ faces fresh challenges in weaning the economy off a decade-long, massive stimulus that has kept interest rates ultra-low and left it with a balance sheet roughly the size of Japan's economy.
At the same time, BOJ Governor Kazuo Ueda is likely to signal the bank's readiness in continuing interest rate hikes, as it weighs risks from U.S. tariffs against persistent domestic food inflation.
"Although developments in trade policies since early spring have had a larger impact on Japan's economy than we had expected, progress towards achieving our price target continues to gain momentum," Ueda said in a speech on June 3, stressing the economy can withstand the hit from higher U.S. tariffs.
At its two-day policy meeting ending on Tuesday, the BOJ is widely expected to maintain short-term interest rates at 0.5%.
Markets are focusing on the board's review of an existing bond-tapering plan running through the March end of the current fiscal year, and the announcement of a new programme that will extend through fiscal 2026.
That would signal a preference to avoid disrupting markets in the wake of last month's spike in super-long government bond yields.
In meetings with bond market players, the BOJ has received a sizeable number of requests to cut the quarterly taper size to around 200 billion yen ($1.38 billion) - which some policymakers see as a reasonable ballpark figure, according to the sources.
Ueda is expected to hold a news conference at 3:30 p.m. (0630 GMT) to explain the policy decision.
The BOJ ended its yield curve control and began tapering its huge bond buying last year. It also raised short-term rates to 0.5% in January on the view Japan was making progress towards durably achieving its 2% inflation target.
Under the current plan laid out last July, the BOJ has been slowing bond purchases by around 400 billion yen ($2.77 billion) per quarter to halve monthly buying to 3 trillion yen by March 2026.
If the BOJ were to cut bond buying by 200 billion yen per quarter from fiscal 2026, its monthly buying will fall to around 2 trillion yen by the March 2027 end of the business year.
Markets are also focusing on Ueda's comments for clues on the timing of the next rate hike.
The BOJ's policy normalisation is at a crossroads as steep U.S. tariffs hurt Japan's export-heavy economy, forcing the board to cut its growth and inflation forecasts on May 1.
But delaying rate hikes for too long could leave the BOJ behind the curve in dealing with inflationary pressure, as firms continue to pass on rising raw material and labour costs.
($1 = 144.4400 yen)
