(Bloomberg) -- Traders appear to be going overboard in their view of the impact that will result from the Bank of Japan reducing bond buying by what its governor called a “substantial” amount. 

That’s the view of several strategists as anticipation rises for the BOJ to announce next month a plan to shrink its massive debt portfolio. The central bank itself estimates that every percentage-point drop in its share of the bond market leads to a 2 basis point increase in 10-year yields.

Assuming that the BOJ will gradually cut monthly debt purchases from the current guidance of ¥6 trillion ($38 billion) to ¥2 trillion in two years, as one strategist forecasts, yields would climb 14 basis points based on the bank’s estimate. 

That’s a much slower rise in yields than indicated by market participants’ forecasts in the latest BOJ survey: they see the benchmark yield rising to 1.23% by the end of March 2026, an increase of about 30 basis points from the current level. 

The BOJ is trying to cut back on its bond holdings that piled up during two decades of quantitative easing, with the total now representing more than half of outstanding Japanese sovereign notes. But with the central bank likely to raise interest rates further and inflation remaining sticky in Japan, policymakers probably want to avoid triggering market turmoil by moving too fast to decrease the bond portfolio.

“The BOJ is more dovish than markets think,” said SBI Securities Co. chief bond strategist Eiji Dohke.“It will reduce buying very cautiously.”

He sees a reduction to ¥2 trillion a month in the next two years. Okasan Securities Co. chief bond strategist Naoya Hasegawa expects the BOJ to halve buying to ¥3 trillion. A cut to ¥2 trillion would decrease the authority’s share in the government debt market to 46% by June 2026 from 53% last month, while a reduction to ¥3 trillion in the same period would make its share 48%, according to Bloomberg analysis. 

“A decrease to ¥3 trillion would indeed be substantial,” said Takenobu Nakashima, chief rates strategist at Nomura Securities Co. in Tokyo. But with the central bank more likely to move gradually, “any big reaction to the release of the BOJ’s purchase reduction plan will prove to be temporary,” he said.

The BOJ said last week that it would announce a plan at its next policy meeting on July 30-31 to cut bond purchases. But it offered few details.

The central bank plans to hold meetings with investors, banks and brokerages about its bond-purchase operations, likely to prepare the market for what’s coming and minimize volatility.

--With assistance from Saburo Funabiki and Hidenori Yamanaka.

©2024 Bloomberg L.P.