by Leika Kihara and Makiko Yamazaki

Tokyo (Reuters) – The Bank of Japan (BOJ) maintained its interest rates on Tuesday at their current levels and decided to slow down the pace of its bond purchases from the next fiscal year, demonstrating its preference for a prudent approach in the standardization of a still flexible monetary policy.

As expected, the Japanese central bank unanimously decided to maintain its short -term interest rates at 0.5% at its two -day meeting which ended on Tuesday.

This decision was made as the climbing of the conflict in the Middle East and the uncertainties concerning the impact of American customs duties complicate the task of the Japanese central bank to take up even low interest rates and reduce a balance sheet which has swelled until the size of the Japanese economy is roughly.

“For the moment, the trade policy of each country is extremely uncertain,” said the governor of Boj, Kazuo Ueda, at a press conference after the meeting of the Central Bank.

“The risk of decline is therefore greater for the Japanese economy and prices,” he said.

The markets focus on how the governor is balanced risks linked to American surcharge and national inflationary pressures in order to obtain clues on the date on which BOJ could resume its interest rate increases.

The institution also decided not to modify its bond emission reduction plan, which runs until March 2026, within which it will reduce its purchases of state bonds of 400 billion yen per quarter.

The BOJ has also defined a new plan which will begin in April 2026, as part of which the institton will cut the amount of the quarterly reduction in half, so that monthly purchases fall to around 2,000 billion yen by March 2027.

Naoki Tamura, a member of the BOJ Council, opposed this decision and asked the Central Bank to continue to reduce its purchases by 400 billion yen per quarter during the year 2026.

The slowdown in the balance sheet indicates that the BOJ is afraid of disturbing markets after a recent outbreak of yields of state bonds in the very long term.

Uncertainty about inflation

The BOJ put an end to its control of the rate curve and began to reduce its massive purchases of bonds. It also noted short -term rates at 0.5% in January, believing that Japan progressed towards the sustainable achievement of its inflation target of 2%.

Basic inflation in Japan, however, reached 3.5% in April, its highest level for more than two years, largely exceeding the target of 2% set by BOJ, in particular due to an increase of 7% in food prices.

In its declaration, the BOJ maintained its point of view according to which inflation should increase gradually due to labor shortages.

According to a recent Reuters survey, a slight majority of economists expect the next 25 basis increase in early 2026, but uncertainty about economic prospects remains high in a context of commercial turbulence.

Japanese Prime Minister Shigeru Ishiba and US President Donald Trump agreed on Monday to advance commercial negotiations, but have so far failed to make a breakthrough that would reduce or eliminate customs duties that threaten to shoot a highly oriented economy.

(Report Leika Kihara, Makiko Yamazaki, Kantaro Komiya and Satoshi Sugiyama; Camille Raynaud and Diana Mandia, edited by Blandine Hénault)

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