Minutes released on August 5 revealed that the Bank of Japan's decision in June to halt the reduction of Japanese government bond purchases was a measure to prevent destabilization of the bond market, not a consideration of fiscal policy. On the same day, Jiji Press reported that Prime Minister Takaichi had requested the BOJ to buy government bonds, but the minutes showed an opinion that "the halt to the reduction of JGB purchases is a measure to avoid a situation where the bond market becomes unstable and negatively impacts the economy." The BOJ is currently normalizing policy by reducing JGB purchases and shrinking its holdings to encourage autonomous interest rate formation in the bond market. If it were to comply with the government's request amid fiscal risk concerns, it would be seen as fiscal subordination and could instead cause long-term interest rates to rise. Governor Ueda has indicated a policy of responding flexibly to sharp interest rate rises that could lead to financial system instability, while taking market reactions into account.
BOJ halting JGB purchase reduction to avoid market instability may lead to higher long-term rates if fiscal subordination concerns persist.
