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BoJ: Normalization has already started – Nomura

With inflationary pressure having receded, expectations that the BOJ will normalize monetary policy have faded, according to analysts at Nomura.

Key Quotes

“In a broader sense of the word normalization of monetary policy has already started, and is making steady progress in our view.”

“The first stage of normalization was marked by the Comprehensive Assessment of September 2016, when the bank switched from policy targets based on the quantity of JGB purchases to a yield curve control policy, and the second stage came when the BOJ removed the reference to a timeframe which had been set at around FY19 for reaching its price stability target of 2%, in our view.”

“In our view normalization in the broader sense has to date focused mainly on efforts to ensure that the current accommodative monetary policy can be maintained for a long time, or to remove anything that might interfere with that outcome. If that’s the case, the third stage will probably consist of further reductions in the BOJ’s JGB purchases and the shortening of the average residual maturity of JGB holdings.”

“If normalization of monetary policy in the broader sense makes the bank’s policy more sustainable, there is likely to be less of an imperative to move to normalization in the narrow sense (ie, exiting the current policy).”

“At the same time, this will limit the issues likely to occur when the bank does make the leap to normalization in the narrower sense. Ironically, slow and steady progress with normalization in the broad sense is likely to put back the timeline for normalization in the narrow sense, which would typically involve adjustments to the 10-year JGB yield target.”

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