The Bank of Japan's June monetary policy meeting is approaching, with a rate hike almost certain. However, expectations for ending the government bond reduction plan (QT) are triggering a market reassessment of its policy stance. The combination of a rate hike and halting QT could tilt the overall policy tone dovishly, increasing pressure on yen depreciation and reinforcing market concerns that the central bank is falling behind the curve.
According to reports from Nomura Securities and a Bloomberg survey of analysts from June 3-8, 96% of respondents expect the BOJ to raise interest rates at next week's meeting. The yen overnight index swap (OIS) market is also pricing in a roughly 95% probability of a hike. Nomura expects the policy rate to be raised from 0.75% to 1.00%.
JPMorgan also forecasts a 25 basis point hike but notes the bar for a hawkish signal is extremely high. If the BOJ simultaneously announces a halt to QT, even with a completed rate hike, the overall meeting could still be interpreted by markets as dovish.
These expectations are already impacting markets. A prior Nikkei report predicting the BOJ would both hike rates and stop reducing bond purchases in June led to a flattening of the Japanese government bond yield curve and modest yen weakness, particularly on the crosses, with USD/JPY subsequently pulling back.
Focus Shifts to Policy Path Guidance as Hike Is Priced In
With market expectations for a June hike highly unified, the decision itself is no longer the main focus. The real market attention is on the language regarding the future rate path in the monetary policy statement and post-meeting press conference.
Notably, BOJ Governor Kazuo Ueda will miss the June meeting due to hospitalization for a liver cyst infection. Deputy Governor Ryozo Himino will chair the policy meeting, and Deputy Governor Shinichi Uchida will host the press conference.
Nomura expects the BOJ statement to maintain the assessment that "real interest rates remain very low" and continue forward guidance that an accommodative monetary environment will persist and further rate hikes will be conducted. Given persistent yen depreciation pressure and the 10-year break-even inflation rate remaining above 2%, Nomura suggests the BOJ might add wording emphasizing its commitment to price stability to shore up market confidence.
JPMorgan economist Ayako Fujita notes that the press conference may mention the possibility of subsequent hikes. However, as markets have already priced in further tightening, the threshold for the BOJ's communication to be perceived as hawkish is significantly raised. To deliver a genuinely hawkish surprise, the BOJ would need to signal an accelerated tightening pace or a push for rates above the 2% neutral rate—which currently appears a marginal scenario.
Nomura also expects the central bank will not provide specific guidance on the pace of hikes or the terminal rate, instead maintaining its consistent stance of "examining data at each meeting and making appropriate judgments." A Bloomberg survey shows the median forecast for the policy rate is 1.25% by end-2026 and 1.50% by end-2027, with the neutral rate estimate also at 1.50%, largely unchanged from April, indicating no widespread expectation for a faster hiking pace.
Divergence on QT Path; Halt Could Be Seen as Dovish
There is significant market divergence on QT. According to a Nomura survey, 44% of respondents expect the BOJ to stop reducing bond purchases, 36% expect a slowdown in the reduction pace, and about 20% expect the current pace to be maintained or accelerated.
Nomura rate strategists Mari Iwashita and Yuna Minegishi expect the BOJ to announce maintaining the current reduction plan until the end of fiscal 2026 (i.e., cutting by 200 billion yen per quarter, reducing monthly purchases to 2.1 trillion yen), and then stop the reductions from April 2027, keeping monthly purchases steady at 2.1 trillion yen. Nomura estimates that even if reductions stop, the BOJ's bond holdings would still decrease by about 45 trillion yen in fiscal 2027 due to redemptions exceeding purchases, meaning net monthly purchases would remain negative. Thus, stopping QT does not equate to balance sheet expansion.
JPMorgan's Ayako Fujita believes slowing the reduction pace to 100 billion yen per quarter would be more reasonable for balancing balance sheet normalization goals with bond market supply-demand pressures. She also notes that the BOJ's recent summary of market participant feedback showed dispersed opinions, with a slight majority leaning toward continuing reductions. In this context, a decision to halt reductions could be interpreted as a political concession to the government's expansionary fiscal stance, raising questions about central bank independence.
Naka Matsuzawa warns that halting QT is a dovish move that could be seen as the BOJ accommodating bond market conditions or even the government, fueling "behind-the-curve" concerns and pushing for a steeper yield curve and weaker yen. He points out that as of end-May 2026, the BOJ holds about 533 trillion yen in government bonds, roughly 45% of the market, suggesting insufficient justification from a market liquidity perspective to stop QT.
Rising "Behind the Curve" Risk Puts Yen and Intervention in Focus
Several institutions highlight the "behind the curve" risk as a core market concern for this meeting.
JPMorgan notes that Governor Ueda previously stated "when underlying inflation reaches 2%, the policy rate will enter the neutral rate zone," but actual policy implementation has deviated from this. Currently, the BOJ's core inflation gauge (excluding fresh food and institutional factors) has risen to nearly 3%, and markets increasingly believe underlying inflation has reached 2%. Even after this hike, the policy rate would only reach the lower bound of the BOJ's own estimated neutral rate range (1.1% to 2.5%), and the BOJ acknowledges this range may have a downward bias due to past easing.
Naka Matsuzawa suggests that if the yen weakens further and the yield curve steepens ahead of the meeting, the BOJ might adopt a more hawkish tone at the press conference, mentioning the pace of hikes or the terminal rate. Simultaneously, authorities could consider intervening in the forex market again.
Nomura also notes the possibility of dissenting votes within the Policy Board. Member Naoki Tamura dissented against the decision to halve the reduction pace at the June 2025 meeting. Additionally, member Toichiro Asada, previously seen as a reflationist, if he votes against a hike, could create room for new member Ayano Sato, who replaces Junko Nakagawa on June 30, to take a cautious stance.
Mid-Term Review of Post-2027 Plans Emerges as New Focus
Nomura points out that as the QT path becomes clearer, market attention is shifting to arrangements for the mid-term review of post-2027 plans. Minutes from the BOJ's bond market group meeting on May 21-22 showed opinions that "the BOJ should proceed with reductions on autopilot toward pre-announced targets" and that "regular mid-term reviews may not be necessary in the future."
Nomura believes that if the BOJ decides to stop reductions, it might simultaneously simplify or suspend the mid-term review mechanism, shifting toward a more automated bond purchase plan. Such an arrangement would somewhat reduce the substantive impact of future Policy Board dissent on balance sheet policy.
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