BOJ falls behind ECB – nomura


Analysts at Nomura explained that monetary policy normalisation is in focus now. 

Key Quotes:

“The ECB made a step toward normalisation by removing its rate-cutting bias. We expect the ECB to make further progress on normalisation, expecting an announcement of tapering in September. “

“The BOJ’s policy normalisation is unlikely to materialise anytime soon though, as there are key differences in the macroeconomic environment and monetary policy set-up that the ECB and BOJ face. 

1) The current inflation momentum is stronger in the euro area (core inflation: +0.9%) than in Japan (BOJ core inflation: 0.0%), while our economists expect a more sustainable inflation recovery path in the euro area into 2018. 
2) Nonetheless, the level of monetary policy accommodation may be more accommodative in the euro area than in Japan at the moment. 
3) The inflation target frameworks of the ECB and BOJ show asymmetry around 2%. The ECB targets “below, but close to 2%”, while the BOJ has introduced an overshooting commitment. Recent communications also suggest the ECB is fine with “[a] sustained adjustment in the path of inflation towards the target,” indicating that normalisation can begin before the target is hit. 
4) We think technical difficulties will also encourage the ECB to start tapering. While the ECB likely sees difficulties in QE extension, the BOJ has already changed its policy framework to YCC to resolve the difficulties of QE. 
5) ECB communications may be more difficult as the ECB has more stakeholders from different economies, as suggested by recent discussions about normalisation sequencing. The BOJ policy board has shifted towards more dovishness as two dissenters will retire in July. 
6) The Abe cabinet still strongly supports BOJ Governor Kuroda, while German politicians have recently repeated that EUR is too weak for Germany. 
7) The common challenge for the BOJ and ECB is the slow recovery in wages, but our economists see a more positive euro area wage outlook. The recent weakness in global inflation momentum, if sustained, will be an obstacle for the two central banks, especially for the BOJ. These differences indicate the BOJ is more likely to remain dovish for longer than the ECB, and as a result, EUR/JPY will likely trade strongly.”

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