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TOKYO, May 29 (Reuters) - Bond market volatility is boosting the case for Japan's central bank to pause the unwinding of its massive debt holdings next fiscal year, which would give Prime Minister Sanae Takaichi some relief amid growing investor concerns about her spending plans.
A pause would mark a turning point in the Bank of Japan's quantitative tightening (QT) plan - in train since 2024 as part of Governor Kazuo Ueda's efforts to unwind a decade-long, massive stimulus.
At its June 15-16 meeting, the BOJ will review its bond taper plan running through March next year and lay out a new plan for fiscal 2027.
With no change expected to the existing taper plan, markets are focusing on whether the BOJ would keep reducing its monthly bond purchases in fiscal 2027 or maintain the current pace.
While there is no consensus yet within the BOJ on the final decision, a pause in taper is increasingly seen as the preferred option with uncertainty over the Iran war keeping bond markets jittery, said two sources familiar with the deliberations.
"Markets remain volatile, so there's no need to rush," one of them said on the BOJ's taper, adding that many market players appeared to favour maintaining the current pace of buying.
Political considerations may also incentivise the BOJ to pause as rising bond yields threaten to confine Takaichi's spending plans.
"What the administration wants to avoid most is rises in bond yields," said one of the sources.
Some investors are now calling on the BOJ to pause its bond taper plan, a central bank survey earlier this month showed, highlighting the challenge it faces in reducing its massive Japanese government bonds (JGB) holdings.
There had already been some indications the BOJ might consider slowing its taper plan amid market uncertainty.
A clearer signal on the BOJ's taper plan will come next week, when the central bank releases minutes of its meeting with bond market participants held on May 21-22.
"We've seen a pretty fast rise in bond yields, which makes it hard for investors to buy bonds.
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