BOJ May Be Forced to Expand Bond Purchases to Suppress Yields
Taylor Wilson
Former BOJ board member Seiji Adachi warns that if the 10-year JGB yield breaches 3%, PM Ishiba's government may pressure the central bank to buy more bonds — setting up a direct collision with the BOJ's ongoing monetary normalization.
Why does the 3% line matter?
PM Shigeru Takaichi's fiscal policy rests on one assumption: economic growth will outpace long-term interest rates.
This means → as long as borrowing costs stay below tax-revenue growth, the debt "rolls" sustainably.
Japan's inflation is roughly 2%, real growth about 1% — nominal growth sums to around 3%. Once the 10-year yield crosses 3%, rates catch up with growth, and the fiscal premise breaks down.
In plain terms = the government's interest bill starts rising faster than its income — the math stops working.
Where is the yield now?
Last week the 10-year JGB yield touched 2.865%, a 30-year high.
The trigger: investors read the Takaichi government's economic blueprint as a softening of fiscal-discipline commitments — more spending, less repayment.
By Thursday, the yield had pulled back to around 2.675% — still some distance from 3%, but the direction has markets on alert.
How might the BOJ respond?
Adachi expects the government may press the BOJ to expand bond purchases to cap yields.
But the government is unlikely to openly call for delaying rate hikes. This means → if markets sense the BOJ's hands are tied, inflation expectations could spiral, pushing yields even higher.
In plain terms = the government can quietly push the BOJ to buy more bonds, but it cannot publicly say "don't raise rates" — saying it would be worse than not saying it.
How can bond buying and normalization coexist?
Since 2024, the BOJ has been gradually slowing its bond purchases to shrink a balance sheet bloated by a decade of ultra-loose policy.
Last month the BOJ paused its balance-sheet reduction plan for the next fiscal year, reaffirming it would conduct emergency bond purchases if long-end yields spike.
This reflects a central bank walking a tightrope: trying to slim down its balance sheet while not letting yields run too fast.
What does the rate path look like?
Adachi expects the BOJ to raise its short-term policy rate to 1.25% sometime between October this year and January next — a level he considers neutral (neither stimulating nor restraining the economy).
Depending on how Middle East tensions affect oil prices, rates could rise further to 1.5% or even 1.75% next year.
The BOJ already hiked to a 31-year high in June; a Reuters poll shows most analysts expect another increase to 1.25% by year-end.
What is the core tension here?
On one side, the government's fiscal expansion needs low rates. On the other, the BOJ's inflation mandate calls for hikes — the two paths point in opposite directions.
Adachi left the BOJ board last March but remains in contact with current policymakers and some of Takaichi's economic advisers — his reading carries insider-adjacent weight.
This means → the tug-of-war between bond-buying expansion and rate normalization will be the defining tension of the BOJ's next policy phase.
Content is for reference only, not financial advice.