Five reasons why the BOJ cannot move to normalize monetary policy - Nomura

Analysts at Nomura explained five factors of impending monetary policy normalization in respect to the boJ this week.

Key Quotes:

"Yen appreciation since purchase operation tapering symbolizes difficulty of normalization."

"The BOJ's reduction to its JGB purchase operations at the beginning of 2018 has led to heightened expectations and conjecture that it could normalize its monetary policy. In this report, we look at five reasons we think early moves toward monetary policy normalization are highly unlikely. 

These five reasons are: (1) Despite recent signs pointing to an acceleration in inflation, the BOJ still looks unlikely to achieve its price stability target of 2%. (2) Even if inflation accelerates, we do not expect a sharp decline in real market interest rates. (3) The "reversal rate" mentioned by BOJ Governor Haruhiko Kuroda in a November 2017 speech may not factor into the decision on whether to normalize monetary policy. (4) We see a lingering possibility that reflationists could be appointed as BOJ governor or deputy governor. (5) Monetary policy normalization risks sparking renewed yen appreciation. We think there is no denying that an early normalization of monetary policy by the BOJ would be seen as a godsend by bond investors both in Japan and overseas, who face the prospect of diminishing returns as a result of a flattening yield curve and the continuation of low-interest rates. This may be the reason for the deep-rooted expectations for normalization. We nevertheless think investors might be well advised to quickly adapt their decisions and strategies to the uncomfortable truth that the current policy regime is likely to be with us for some time."