The Bank of Japan (BOJ) may be intent on keeping its easy monetary policy, but with the central bank poised to run out of bonds to buy, it could be forced into tapering next year, analysts say.
"Government related funds will be selling bonds to the BOJ for the remainder of the year, but that supply will run out towards the end of 2015," Bank of America Merrill Lynch rates strategist Shuichi Ohsaki told CNBC by phone. When that supply runs out, "the BOJ will have to change its current policy," he said.
Tasked with dragging Japan out of decades of deflation, for the past two years, the BOJ has been pumping massive amounts of liquidity into the economy by buying government bonds.
The quantitative easing (QE) program, first of 50 trillion yen ($413 billion) annually and expanded to 80 trillion yen last October, has driven a stock market rally, sent the yen plunging, and driven down interest rates across the curve. But so far, it has failed to stimulate much inflation at all, let alone hitting the central bank's targeted 2 percent rate.
The core consumer price index, the BOJ's preferred yardstick, hasn't even come close to two percent since 2013, peaking at 0.8 percent in February 2014; it came in at just 0.1 percent on-year in March 2015.
While the BOJ is expected to stick with its current policy at its meeting on Friday, the bond market may be just about tapped out. The central bank already owns a record 27.6 percent of the roughly 1 quadrillion yen of outstanding Japanese Government bonds (JGB), according to Japan Macro Advisors. If the BOJ continues to buy up bonds at the current pace, its share is set to rise to over 30 percent in 2015 and to 40 percent by the end of 2016.