Global Market: Japan may pressure BOJ to boost bond buying if yields top 3%, says ex-policymaker

Former Bank of Japan board member Seiji Adachi said in a Reuters report that a rise in the benchmark 10-year Japanese government bond yield beyond the 3% mark could prompt the government to lean on the Bank of Japan to step up bond purchases. Such a move would cast doubt on the country's fiscal outlook and increase pressure on policymakers to contain borrowing costs.

Adachi told Reuters that a sustained rise in long-term yields beyond 3% would raise questions over Japan's fiscal sustainability and could undermine the government's strategy of financing higher spending through economic growth that outpaces borrowing costs.

The comments come as Prime Minister Sanae Takaichi's administration seeks to justify increased fiscal spending on the assumption that nominal economic growth will remain stronger than long-term interest rates, allowing Japan to manage its massive public debt without jeopardising fiscal stability.


According to Reuters, Adachi said this assumption would come under strain if the 10-year Japanese government bond (JGB) yield exceeds 3% while inflation remains around the BOJ's 2% target and real economic growth stays close to 1%.

The benchmark 10-year JGB yield touched a 30-year high of 2.865% last week after investors interpreted Takaichi's draft economic blueprint as signalling a softer commitment to fiscal discipline. The yield was trading around 2.675% on Thursday.

Reuters reported that Adachi believes the government likely views the 3% to 3.5% yield range as a critical threshold. A rapid move beyond that level could prompt policymakers to urge the BOJ to expand bond purchases to stabilise the market.

He also told Reuters that the recent rise in yields reflects investor concerns about Japan's future fiscal discipline rather than its current fiscal position, despite the country's debt-to-GDP ratio showing signs of improvement.

The BOJ has been reducing its bond-buying programme since 2024 as part of efforts to unwind years of ultra-loose monetary policy and shrink its balance sheet, which expanded significantly during former Governor Haruhiko Kuroda's aggressive stimulus campaign.

However, Reuters noted that the central bank last month decided to pause the pace of bond purchase reductions from the next fiscal year and reiterated its readiness to conduct emergency bond-buying operations if long-term yields rise sharply.

While the BOJ no longer considers bond purchases a primary monetary policy tool after ending yield curve control, any emergency intervention would complicate its ongoing policy normalisation efforts.

Adachi also said the government is unlikely to push publicly for delaying further interest rate increases because doing so could heighten fears of persistent inflation and lead to even higher bond yields, according to Reuters.

With inflation expected to edge higher in the coming months, Adachi expects the BOJ to raise its short-term policy rate to 1.25% sometime between October and January. He said that level would broadly represent a neutral interest rate for the Japanese economy.

Once the policy rate reaches 1.25%, the central bank's future rate decisions are likely to shift from gradually reducing monetary accommodation toward containing inflation risks.

Adachi also suggested that if crude oil prices rise due to renewed geopolitical tensions in the Middle East, the BOJ could eventually lift interest rates further to between 1.5% and 1.75% next year.

The BOJ raised interest rates to their highest level in 31 years in June as part of its policy normalisation process. A majority of economists surveyed by Reuters expect another increase to 1.25% before the end of the year.

Separately, sources familiar with the BOJ's thinking said in a Reuters report that the central bank is expected to leave interest rates unchanged at its policy meeting this month while maintaining its focus on upside inflation risks, as persistent cost pressures from the weak yen and robust artificial intelligence-related demand continue to offset the impact of lower oil prices.