The minutes of the Bank of Japan's June monetary policy meeting, where it decided to halt the reduction of government bond purchases, have been released, showing the decision was made independently of fiscal policy. Some media reports suggest Prime Minister Takaichi asked the BOJ to give consideration to its bond buying, but the BOJ is considering a scheme to avoid fiscal subordination by setting sufficient reserve balances on the liability side of its balance sheet and determining the corresponding amount of government bond holdings. The minutes introduced the view that halting the reduction of bond purchases is a measure to prevent destabilization of the government bond market, and also discussed the problems of an excessively large balance sheet and the need to set appropriate reserve balances. The BOJ's next move is strongly hinted to be the setting of sufficient reserve balances, which would make it possible to determine bond holdings independently of the impact on fiscal policy and long-term interest rates.
BOJ halting bond purchase reduction and considering sufficient reserve balances may lead to higher long-term yields as it avoids fiscal subordination, potentially increasing JGB yields.
