The BOJ has been an aggressive bond buyer to defend its ultra-low rate policy. That has pushed its ownership to more than half the market, putting a squeeze on liquidity and impairing market function.
In its monetary policy statement, the bank said it will continue its JGB purchases at broadly the same amount as before.
However, it also made cuts to the stated maximum limit of bond purchase amounts. The changes will apply to all bond maturities and for the April-June period.
For 5-10 year JGBs, the BOJ will purchase up to 550 billion yen, from 900 billion yen previously. For 3-5 year bonds, it will purchase up to 500 billion yen, compared with 750 billion yen previously.
These "drastic cuts" at the maximum end signals the BOJ will gradually step down its involvement in the market through bond-buying operations, said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management.
"Yields may rise, but psychologically, this is positive news for market players. This means the BOJ has started to allow the market to control yields."
The central bank will conduct bond buying operations at the same frequency across the curve as before.
The announcement comes as the BOJ ended its negative interest rate policy and ditched its bond yield control at its latest meeting, ushering in a new era of monetary policy in Japan.
It also discontinued its purchases of risky assets such as exchange-traded funds (ETF), which it began buying in 2010 as part of its massive stimulus programme. The BOJ increased their purchases several times until March 2021 when it decided to step in only during huge market turbulence, which traders had interpreted as declines of 2% or larger in Japan's Topix index. The central bank skipped ETF purchases last week despite a sharp drop in local shares.
(Reporting by Brigid Riley and Junko Fujita; Editing by Kim Coghill, Muralikumar Anantharaman and Shri Navaratnam)
By Brigid Riley and Junko Fujita
