The Bank of Japan (BoJ) decided to keep its short-term interest rate unchanged at 0.5% on Tuesday, June 17, 2025.
The Japanese central bank also maintained its existing bond tapering plan, which involves reducing government bond purchases by JPY 400 billion per quarter. This would bring monthly purchases down to approximately JPY 3 trillion by March 2026.

However, starting from the 2026 fiscal year, the reduction pace will be slowed to JPY 200 billion per quarter, aiming for monthly purchases of around JPY 2 trillion by March 2027.

BoJ’s move to decelerate the balance sheet reduction reflects its cautious approach in unwinding the massive stimulus program that has been in place for over a decade.

This decision comes amid escalating tensions in the Middle East and trade disputes driven by the United States. These external pressures complicate BoJ’s efforts to raise interest rates from low levels and shrink its bloated balance sheet, which has grown to rival the size of Japan’s economy.

“There are various risks to the outlook. In particular, there is significant uncertainty about how trade and other policies will evolve across different jurisdictions and how global economic activity and prices will react,” BoJ said in its statement, as reported by Reuters.

Effects of the BoJ’s Decision

Board member Naoki Tamura opposed the decision, arguing that the tapering should continue at JPY 400 billion per quarter in 2026.

Following the announcement, yields on Japanese Government Bonds (JGB) rose, with the 10-year benchmark yield climbing 3 basis points to 1.48%.

BoJ’s slower balance sheet reduction reflects its concern over potential market instability, especially after the recent surge in ultra-long bond yields.

“Today’s decision is market-friendly. Slowing the pace of tapering helps limit the rise in long-term interest rates,” said Saisuke Sakai, senior economist at Mizuho Research & Technologies in Tokyo.

BoJ stated it will conduct a mid-term review of the fiscal 2026 tapering plan during its June policy meeting next year.

“If long-term interest rates rise too quickly, BoJ will respond promptly, such as by increasing bond purchases,” the bank added, noting that its holdings of JGBs are expected to decline by around 16–17% by March 2027 compared to current levels.

BoJ’s Fight Against Inflation

Markets are now watching how BoJ Governor Kazuo Ueda balances the risks posed by U.S. tariffs with domestic inflationary pressures.

BoJ ended its yield curve control policy and began large-scale bond tapering last year. It also raised the short-term interest rate to 0.5% in January, based on its assessment that Japan was nearing a sustainable 2% inflation target.

However, BoJ’s policy normalization faces challenges, as high U.S. tariffs weigh on Japan’s export-driven economy. On May 1, BoJ even revised down its forecasts for both growth and inflation.

On Monday, Japanese Prime Minister Shigeru Ishiba and U.S. President Donald Trump agreed to continue trade talks, but failed to reach a breakthrough on tariff reductions that threaten Japan’s economy.

Tensions between Iran and Israel add to policymakers’ concerns, potentially driving up crude oil prices and increasing market volatility.

Still, delaying rate hikes for too long risks leaving BoJ behind in tackling inflation, especially since businesses are already passing higher input and labor costs onto consumers.

Japan’s core inflation reached a two-year high of 3.5% in April — well above BoJ’s 2% target — largely driven by a 7% surge in food prices.

BoJ maintained its view that inflation is expected to gradually rise, mainly due to ongoing labor shortages.

“We believe BoJ should normalize its policies, as inflation appears to be persistently above the 2% target,” said Khoon Goh, head of Asia research at ANZ in Singapore.

“A weak yen is clearly contributing to inflation pressures, especially amid the recent oil price spike driven by geopolitical uncertainty. This raises the risk of short-term inflation, as Japan is a major oil importer,” he added.

Implications for Indonesia

Japan’s tapering could increase capital outflow risks and weaken the rupiah, although its impact is expected to be less than that of U.S. tapering. The slower pace of BoJ’s tapering is therefore seen as potentially positive for Indonesia.

BoJ’s measured approach to quantitative tightening is considered market-friendly, minimizing the risk of a sudden spike in Japanese bond yields.

This makes Japanese investors less likely to swiftly withdraw funds from emerging markets, including Indonesia.

As a result, foreign capital outflows from Indonesia due to today’s BoJ decision are expected to be minimal or even neutral.

Because BoJ’s policy normalization is not aggressive, the impact on the rupiah from yen movements is relatively limited. However, the rupiah remains vulnerable to the U.S. dollar due to global uncertainties like trade wars and the Iran-Israel conflict.

BoJ’s moderate stance also helps prevent a sharp increase in global interest rates.

This gives Bank Indonesia room to maintain its benchmark rate at 5.50% to support rupiah stability. BI won’t be under immediate pressure to act as long as global bond yield pressures remain manageable.