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Will The Bank Of Japan Normalize? And What If It Doesn't?

Roger Salus profile picture
Roger Salus


  • The central banks of most developed economies joined the Federal Reserve in taking the first steps toward normalizing monetary policy in 2017.
  • The Bank of Japan at first glance appears to be playing along by engaging in "stealth tapering" with its yield suppression policy.
  • Yen strength and rising bond yields may yet force the BoJ to resist normalization, or even buck the trend by reverting back to increasingly stimulative monetary policies.
  • Having historically been accused of currency manipulation by trading partners, actions by the BoJ in the next 12 months could present yet another set of challenges for international trade.

The next 12 months suggest continued monetary tightening from the developed world's central banks. Now, it can be argued that the term "normalizing" is preferable to "tightening" given the extraordinarily abnormal monetary policies observed since the Great Financial Crisis (GFC). Whichever term you use, however, there is no denying the relatively hawkish moves made by the Federal Reserve, Bank of England, and Bank of Canada in the last year or more. There have also been hints from the European Central Bank (ECB) and the Bank of Japan regarding less accommodative policies, too. Ultimately, I expect the ECB to essentially follow through with its stated, albeit incremental, normalization plans. However, the Bank of Japan is a most interesting wildcard.

There are several macro factors which cause me to believe that the Bank of Japan (BoJ) will not be able to normalize policy over the next 12 months, or for perhaps much longer. Most glaring is the continued weakness of the US dollar. The Japanese economy has benefited from increased exports recently, but manufacturers are already worried that Yen strength may spoil the party. Also of importance is the BoJ's commitment to yield suppression, and its stated intent to keep the yield of the 10-year Japanese Government Bond at essentially zero. These factors, in combination with an inflation rate that remains stubbornly unmoved, suggest that normalization is unlikely. It seems at least as likely, especially given recent volatility in bond markets, that the BoJ's recent reduction in annual bond-buying may be quite temporary.

The bigger question will then come down to how her trading partners will react if Japan stands apart as the sole developed nation unwilling (or unable) to normalize monetary policy. Presumably, the current US administration will not take lightly to what can easily be interpreted as currency manipulation. Nor is it likely China will

This article was written by

Roger Salus profile picture
Mr. Salus specializes in macroeconomic topics. He's the author of Twilight of a Middle Class: Retirement Crises in Our Two Economies World, which is widely available on Amazon and elsewhere. He holds a master's degree in Political Theory, as well as a bachelor's degree in Political Science and Economics. He lives somewhere in the Americas.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (4)


Thanks for the interesting article. Just one thing; you write that the ECB has made a "commitment to reduce its bond purchases by one half starting in September 2018".

It actually reduced its purchases by half in January and plans to end QE in September, I believe.
Roger Salus profile picture
Whoops! Good catch, hhh.

You're right, that was a typo on my part.

Have a great week.
James Hanshaw profile picture
Hello Roger. Interesting article. I do not watch Japan much and do not invest there because it seems to be a very closed economy. I do not know if things have changed but years ago they did not have tariffs as such to protect again foreign imports but they had - and maybe still have - a very complex internal distribution system that adds costs at every step of the chain for foreign goods making them very expensive compared to local products.

I also have my own theory backed up by experience about weak and strong currencies. If you make the right product, price is not the first consideration for buyers; design, brand name, quality and desire all come ahead of price. When managing a German machinery maker in the Asia/Pacific region during the days of an ever strengthening DM I won against much cheaper Japanese machines using production economic selling arguments such as higher output, higher precision, less raw material waste etc. Switzerland today does ok with a strong currency. Our debt to GDP is under 40% - slightly better than the figure you mention for Japan! James
Roger Salus profile picture
Agreed, James. Worrying about the currency's effect on exports and manufacturing reflects short-term thinking.

Make a good product and people will buy it. Frankly, I think the Japanese make very high quality products in the current age, so I find it troubling that they are afraid to let the market determine the value of the yen.

The days when Japan produced cheap, low quality goods is ancient history. That's what China does now.
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