Bank of Japan Faces Increased Tension with Government: Koizumi Urges Expanded Bond Purchases, Ueda Stands Firm on Monetary Normalization

August 10th. The yield on Japanese government bonds continued to rise, intensifying the tug-of-war between the Japanese government and the Bank of Japan over the direction of monetary policy. The market is watching whether the Bank of Japan can continue policy normalization under fiscal expansion pressure.

On Monday, the yield on Japan's 10-year government bond rose to 2.805%. Some analysts believe that if it breaks the 3% mark, it may trigger a new round of bond selling.

This rise in yield is mainly influenced by Japanese Prime Minister Sanae Takaichi's expansionary fiscal policy. As one of the world's most indebted developed economies, the rising financing cost of the Japanese government has raised market concerns. The United States has also exerted pressure on Japan's fiscal and monetary policy direction.

Reports indicate that Takaichi has long supported loose policies similar to "Abenomics" and had urged the central bank to expand bond purchases when necessary during a meeting with Bank of Japan Governor Haruhiko Kuroda in May this year to suppress the rise in long-term interest rates.

At the same time, officials from Takaichi's government have expressed concerns about the Bank of Japan's balance sheet reduction plan, suggesting that the pace of reduction may be too fast. Toshihiro Nagahama, a member of a Japanese government expert panel, stated that the Takaichi government is more inclined to stabilize the economy through quantitative policy rather than relying on traditional tools such as rate hikes.

However, the Bank of Japan is trying to maintain the credibility of monetary policy normalization. The Bank believes that the main driver of the rise in Japanese government bond yields is inflationary pressure, not a decrease in bond purchases. The Bank of Japan had previously ended its yield curve control policy and sees the reduction of bond purchases as a crucial step in exiting ultra-loose policy.

Bank of Japan officials have warned that if the market perceives bond purchases as aimed at lowering government financing costs or achieving debt monetization, it could damage the central bank's independence and anti-inflation credibility.