Bank of Japan Survey Reveals Persistent Liquidity Concerns Amid Gradual Yield Normalization (August 2026)

Key Market Functioning Metrics

The survey's liquidity indicators show concerning stagnation across all dimensions. The bid-ask spread DI worsened to -25 (from -23 in May), with 30% of respondents characterizing spreads as "wide." Order book depth remains problematic, with a DI of -33 (from -26), as 34% reported "small" order quantities. Only 16% of participants reported high dealing frequency, while the DI for counterparty diversity stood at -3, unchanged from the previous survey.

Transactional challenges persist, with just 30% of institutions able to execute trades at expected prices (DI: +16) and 33% achieving desired lot sizes (DI: +19). These figures represent minimal improvement from May 2026, suggesting structural liquidity constraints in the JGB market despite the BOJ's reduced bond purchases, which have declined to ¥4.8 trillion monthly as of Q2 2026.

Yield Curve Projections and Policy Implications

The survey reveals consensus expectations for continued gradual yield increases across the curve. Median forecasts show:

• 2-year yields rising from 1.60% currently to 1.70% by December 2026 and 2.00% by March 2029
• 5-year yields climbing from 2.10% to 2.30% over the same period
• 10-year yields reaching 2.95% by March 2027 and stabilizing at 3.00% thereafter

Probability distributions reveal 72.5% of respondents expect 10-year yields between 2.76-3.50% by March 2029, with just 6.0% anticipating yields above 3.75%. This clustering suggests market participants believe the BOJ will prevent disorderly yield spikes while continuing its exit from ultra-loose policy.

Structural Liquidity Challenges

The data reveals persistent market dysfunction despite policy normalization. The three-month change DI for overall market functioning registered 0%, indicating no improvement since May. Particularly concerning is the dealing frequency DI of -11 for changes over three months, worse than the -6 reading for current conditions.

These liquidity constraints appear structural rather than cyclical, as evidenced by:

• 65% of respondents reporting no improvement in bid-ask spreads
• 84% seeing no increase in order book thickness
• 77% observing no growth in dealing frequency

Policy Outlook and Next Steps

The survey timing captures market sentiment following the BOJ's July 2026 decision to maintain its short-term rate at 0.25% while further adjusting YCC parameters. With the next policy meeting scheduled for September 21-22, 2026, the stagnant liquidity metrics may prompt consideration of additional market functioning measures.

Forward-looking elements suggest the BOJ faces a delicate balancing act - the projected yield increases indicate expectations for continued policy normalization, but the liquidity data warns of potential market fragility. This dynamic will likely influence the pace of further YCC adjustments, with most participants apparently anticipating no abrupt changes to the current gradualist approach.

The next survey publication date is set for December 1, 2026, which will provide crucial insights into autumn market conditions following what many expect to be another incremental policy adjustment in September.