Takaichi urged BOJ chief to buy JGBs at May meeting

Prime Minister Sanae Takaichi requested Bank of Japan Governor Kazuo Ueda to purchase Japanese government bonds (JGBs) during their May meeting in order to control escalating long-term interest rates, according to sources. It is uncommon for the prime minister to propose a specific monetary policy instrument. The suggestion might initiate a discussion about the central bank's autonomy.

Takaichi told Ueda during their 20-minute meeting at the Prime Minister's Office that she would like the BOJ to grasp her Cabinet's policy agenda and carry out suitable monetary policy accordingly. At a time when the BOJ is cutting its JGB purchases, the prime minister sought an appropriate response to guarantee market stability, requesting the central bank to buy JGBs if required.

Ueda responded that it is essential to consider market reactions and stated that the central bank would respond if circumstances warranted doing so, the sources disclosed. Takaichi's demand reflected her wish to prevent a rise in long-term interest rates that could arise from possible expansion in government bond issuance to finance crisis preparedness expenditures and increased defense spending under her "responsible and proactive" fiscal policy.

Three weeks after the Takaichi-Ueda meeting, the BOJ determined on June 16 to increase its policy interest rate to 1% and suspend reducing its JGB purchases in April 2027. The central bank also affirmed its intention to act against any surge in bond yields, such as raising bond purchases flexibly. The BOJ has clarified that the June decision was not linked to Ueda's discussion with Takaichi.

However, a government official said, "The prime minister's office seemed to view the decision as a compromise where the government accepted the rate hike in exchange for the BOJ revising its bond-buying plan." "If long-term bond yields continue to rise, the prime minister could demand larger bond purchases," the official further added.

Since discontinuing its extensive monetary easing program in March 2024, the BOJ has consistently indicated it would buy government bonds flexibly if yields rose. However, it has not done so during any period of increasing long-term yields. If the BOJ recommences broadening its bond holdings in line with the government's fiscal needs, financial markets might perceive the move as "fiscal financing," where a central bank effectively underwrites government deficits.