Japan’s monetary base fell 15.7% year-on-year in August, exceeding the market’s forecast for a 13.5% decline, data from the Bank of Japan (BOJ) showed. The monetary base comprises currency in circulation and financial institutions’ reserves at the central bank, making it an indicator of monetary policy and the BOJ’s balance sheet. Its contraction reflects quantitative tightening (reducing a central bank’s balance sheet) as the BOJ phases out its large-scale asset purchases and yield curve control (targeting government bond yields). The steeper-than-expected decline was attributed to reduced purchases of government bonds and other assets, alongside the expiry of some pandemic-related lending facilities. The shift may support the yen by reducing the currency supply, although interest-rate differentials and global market conditions remain important. Japan’s core consumer inflation has exceeded the BOJ’s 2% target for more than a year, increasing pressure to reconsider prolonged stimulus. The normalization process could affect borrowing costs, government debt servicing and the financial sector, while the yen and Japanese government bonds remain sensitive to further policy signals.