Japan: Will 2018 be the exit year for the BOJ? - Nomura

As occurred in late 2005, market interest in the BOJ’s exit strategy from its easing policy is now rising, amid the favourable macro environment, according to analysts at Nomura. 

Key Quotes

“The LDP won another landslide victory in October, and foreign equity inflows into Japan have been strong. The ECB announced further tapering of its QE programme and the BoE hiked for the first time in 10 years. As the Fed continued to hike its policy rate, the BOJ is becoming a lone dove again, as in late 2005. In this positive environment, it is unsurprising that markets are focusing on the risk of monetary tightening by the BOJ rather than easing.”

“In fact, the latest Bloomberg survey shows that 86% of BOJ watchers think the next BOJ step will be tightening, while almost all of them believe this will not occur until after April next year. Even though new BOJ board member Goshi Kataoka has recently argued the necessity of more easing, investors’ focus has clearly shifted to a possibility of tightening rather than additional easing. The most recently, Governor Kuroda’s comments on the “reversal rate” attracted market interest.”

“Current economic and financial market conditions are more favourable than in 2005-06. The financial conditions index has been more accommodative recently in Japan. The momentum of recent economic growth is not meaningfully stronger than in 2005-06, but the unemployment rate is already much lower. In 2006, four indicators were viewed as important criteria to exit deflation – CPI inflation, the GDP deflator, unit labour cost, and the GDP gap – and they are all improving. They are mostly better than in 2005- 06. Fundamentally, if we use 2005-06 as a template, there is a case for BOJ normalisation in 2018.”