Reports have emerged of exchanges between the government and the Bank of Japan over government bond purchases, with an ample-reserves framework being discussed as the Bank’s next move. As fiscal risks rise, attention is also focusing on long-term interest rate trends.
According to a report by Jiji Press on 5 August, market participants heard that Prime Minister Takaichi (高市) had asked the Bank of Japan governor to halt the reduction in government bond purchases. In response, the Bank is considering how to proceed in light of discussions concerning the relationship between fiscal and monetary policy.
The same day, the Bank of Japan released the minutes of its June Monetary Policy Meeting. The minutes detail the view that the decision to halt the reduction in government bond purchases was not made in relation to fiscal policy. Following the report, some market participants expressed concern that fears of fiscal dominance would resurface.
The risk of instability in long-term interest rates is currently being highlighted in connection with rising fiscal risks. The Bank of Japan is proceeding with reductions in its government bond purchases and shrinking its outstanding holdings, while seeking a response that does not undermine financial system stability.
The minutes state that an ample-reserves framework is being discussed as the Bank of Japan’s next move, suggesting an approach in which the level of reserve balances is determined first, followed by the amount of assets held. The aim is to secure stability in policy management while avoiding fiscal dominance.