Connecting Markets East & WestA brief history of unconventional monetary easing by the
Bank of Japan and Japan’s inflation

Takashi MIWA
Head of Japan Economic Research
Nomura Securities, Co. Ltd.
+81 3 6703 1280
takashi.miwa@nomura.com
October 19, 2023

See Appendix A-1 for analyst
certification, important disclosuresand the status of non-US analysts.
Any authors named on this report are
research analysts unless otherwise
indicated.

© Nomura

The points we focus on in this article

How Japan's inflation differs from other DMs
and whether it can be sustainably highA brief history of ultra-easy monetary policyby the Bank of Japan under Kuroda
governorship
Changes likely to be made under Governor
Ueda

Outlook for BOJ monetary policy
1How Japan's inflation differs from other DMs
and whether it can be sustainably highA brief history of ultra-easy monetary policyby the Bank of Japan under Kuroda
governorship
Changes likely to be made under Governor
Ueda

Outlook for BOJ monetary policy2

A simple comparison of core inflation
 Japan’s inflation is still seriously lagging behind other major developed economies
Core CPI inflation in four major more economically developed regions(each region’s own definition)y-y, %

10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0

CY

00

01

02

03

04

05

06

07

08

09

Eurozone

10

11

12

Japan

13
US

14

15

16

17

18

19

20

21

22

23

UK

Source: Nomura, based on data from Japan's Ministry of Internal Affairs and Communications (MIC), the European Central Bank (ECB), and UK Office for National Statistics (ONS)3

How Japan’s inflation differs from others
 Major difference between Japan and other DM lies in service inflation…
Comparison of change in CPI before andafter pandemic—US

Comparison of change in CPI before andafter pandemic—eurozone

Comparison of change in CPI before andafter pandemic—Japan

Annual average, %Annual average, %Annual average, %

7.0

Goods

4.0

4.0
Goods

Services
6.0

5.0

3.5

3.5
Goods

3.0

3.0

Services

Services

2.5
4.0

2.5
2.0

3.0

2.0
1.5

2.0

1.5

1.0

1.0

1.0

0.0

0.5

0.0

0.0

-0.5

-1.0

CY17-19

20Q2-23Q2

0.5

CY17-19

20Q2-23Q2

Note: Goods exclude food and energy
Source: Nomura, based on data from Japan's Ministry of Internal Affairs and Communications (MIC) and the European Central Bank (ECB)

CY17-19

20Q2-23Q2

4

We got a significantly high wage hike, but…
 …we still need a stable 3% wage rise p.a. even with neutral output gap, which may be compatible with asustainable 2% inflation
Wage Phillips curve
Scheduled cash earnings, y-y, %

6.0
5.0
4.0

2013-2023
1998-2012
1991-1994

3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
-8.00

Output gap(BOJ est.),%

-6.00

-4.00

Note: Straight lines are trend lines based on simple regression for each period
Source: Nomura, based on MHLW and BOJ data

-2.00

0.00

2.00

4.00

6.00
5

Any changes in pricing behavior of Japaneseenterprises?
 The current rush to cost pass-through by Japanese enterprises may not last longer
Outlook for Output Prices in the BOJ Tankan (All-enterprise basis)
annual average, %3.5
3.0
1 year ahead

2.5

average of 1-3 years

average of 3-5 years

2.0
1.5
1.0
0.5
0.0
-0.5

14

Source: Nomura, based on BOJ data

15

16

17

18

19

20

21

22

CY

23

6

Achievement of 2% inflation goal still unlikely As commodity and imported inflation diminishes, a domestic inflation is also likely to decelerate
Nomura’s Core CPI inflation forecasts(y-o-y, %)4.5

Nomura Est.

EnergyCore foodCore core CPI
Core CPI excluding impacts of VAT and free education policyCore CPI

4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5

（Q/Y）
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1
12

13

14

15

16

17

18

19

20

Note: The core CPI is the consumer price index less fresh food. Core core CPI = Core CPI - energy - core food (excluding fresh food and alcohol).
Source: Nomura, based on Ministry of Internal Affairs and Communications data

21

22

23

24

25

26
7

How Japan's inflation differs from other DMs
and whether it can be sustainably highA brief history of ultra-easy monetary policyby the Bank of Japan under Kuroda
governorship
Changes likely to be made under Governor
Ueda

Outlook for BOJ monetary policy8A brief history of unprecedented monetary easing – (1) Stage 1: “All-out attack” under Governor Kuroda‘Unprecedented easing measures under Governor Kuroda
Date
2013
22-Jan4-Apr

Decision

Key points

Joint Statement of the Government and the Bank ofJapan on Overcoming Deflation and Achieving
Sustainable Economic Growth

Setting of price stability target of 2% inflation

Introduction of QQE· Change in target for money market operations from uncollateralized call rate (overnight) tomonetary base (annual increase of around ¥60-70trn)·
Increased purchases of long-term JGBs and lengthening in maturities (annual increase inholdings of around ¥50trn, increase in average remaining maturity of JGB purchases from justunder three years to over seven years).
· Increase in ETF and J-REIT purchases (purchases at pace equivalent to around ¥1trn for ETFs
and ¥30bn for J-REITs annually)· Continue with QQE for as long as needed to maintain in a stable manner the price stability target
of 2% that it aims for

Expansion of QQE· Larger increase in monetary base (equivalent to around ¥80trn annually)· Increase in asset purchase amount and increase in average remaining maturity (annual increaseof around ¥80trn in long-term JGB holdings, average remaining maturity of around 7-10 years on
JGB purchases, ETF purchases of around ¥3trn a year, J-REIT purchases at pace of ¥90bn per
year)

Introduction of Supplementary Measures for
Quantitative and Qualitative Monetary Easing· Increasing average remaining maturity of JGB purchases to around 7-12 years from 2016
· Moves including establishment of new budget for ETF purchases to support companies actively
investing in physical and human capital· Expand eligible collateral for BOJ provision of credit as a way to smoothly implement QQE

2014
13-Oct2015
18-Dec2016
29-JanIntroduction of QQE with negative interest rates

29-JulEnhancement of Monetary Easing

Source: Nomura, based on BOJ data

· Structure of three tiers for financial institutions' current accounts held at the BOJ, with negativeinterest rate of -0.1% applied to a portion of these· Purchase ETFs so that the amount outstanding will increase at an annual pace of about ¥6trn
9

A brief history of unprecedented monetary easing – (2) A shift into "War of attrition"
Comprehensive Assessment and introduction of yield curve control in Sep 2016
Date

Decision

Key points

2016
Assessment of how the QQE mechanism is functioning and what sort of factors
Announcement of Comprehensive Assessment of ·prevented the achievement of 2% inflation
Developments in Economic Activity and Prices aswell as Policy Effects since the Introduction of· Assessment also of effects and impact, including impact of QQE with negative interest
Quantitative and Qualitative Monetary Easing (QQE)
rate on financial markets and financial institutions· Yield curve control
21-SepIntroduction of QQE with yield curve control

Short-term interest rates: negative interest rate of -0.1% applied to policy-rate balances incurrent account balances held by financial institutions at the BOJ
Long-term interest rates: BOJ to purchase long-term JGBs in order to keep the yield on 10year JGBs to around current level of 0%
Policy of yield curve control with aim of maintaining JGB purchasing around the current level(an annual increase of around ¥80trn in outstanding holdings)· Overshooting commitment
QQE with yield curve control to be continued until 2% price stability target maintained instable manner

Source: Nomura, based on BOJ data10

Response of real growth and inflation against monetary
policyReal growth and CPI inflation under the long-lasting monetary easing
y-y, %

y-y, %
6.0

5.0
Real GDP (LHS)Core CPI excl. VAT hike impact (RHS)

4.0

4.0

3.0

2.0

2.0
0.0
1.0
-2.0
0.0
-4.0

-1.0

-6.0

-8.0

-2.0

95

96

97

98

99

00

Source: Nomura, based on Cabinet Office and MIC data

01

02

03

04

05

06

07

08

09

10

11

12

13

14

15

16

17

18

19

20

CY
21 22

23

-3.0

11

Response of JGB yield under unprecedented monetaryeasing
 A large scale JGB purchase by BOJ along with NIRP caused extreme flattening of yield curve
JGB 2y and 10y yield
%

1.0
0.8

2y

10y

0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6

yy/m

13/1

14/1

Source: Nomura, based on Bloomberg data

15/1

16/1

17/1

18/1

19/1

20/1

21/1

22/1

23/1

12

A brief history of unprecedented monetary easing – (3) In the face of various negative shocks, BOJ struggled in enhancing flexibility of YCC
Policy adjustments made under YCC regime
Date

Decision

Key points

Decision to strengthen framework for continuous powerfulmonetary easing• Introduction of forward guidance for policy interest rate
BOJ intends to maintain the current extremely low levels of short- and long-term interest rates for an extended
period of time, taking into account uncertainties regarding economic activity and prices, including the effects of theconsumption tax hike due to take place in October 20192018

31-Jul
2019

25-Apr30-Jul

31-Oct
2020

16-Mar
27-Apr• Clarification of forward guidance for policy interest rate
Decision to make BOJ's policy interest rate forward guidance
Assumes current extremely low long- and short-term interest rates will be maintained at least through spring 2020
clearer and implement measures contributing to the continuation based on uncertainties regarding economic activity and prices including developments in overseas economiesof powerful monetary easing
and the effects of the consumption tax hike
• Implementation of measures contributing to the continuation of powerful monetary easing (details omitted)
BOJ clarifies that in a situation where downside risks to economic activity and prices, mainly regarding
A change made in policy statement
developments in overseas economies, are significant, the Bank will not hesitate to take additional easing
measures if there is a greater possibility that the momentum toward achieving the price stability target will be lost.
• A change made in forward guidance for policy interest rate
'As for the policy rates, the Bank expects short- and long-term interest rates to remain at their present or lower
Decision of the new forward guidance for policy rates
levels as long as it is necessary to pay close attention to the possibility that the momentum toward achieving theprice stability target will be lost.'
Enhancement of Monetary Easing in Light of the Impact of theOutbreak of the Novel Coronavirus (COVID-19)
Enhancement of Monetary Easing

Source: Nomura, based on BOJ data

• Increase in purchases of CP and corporate bonds (will conduct purchases with the upper limit of the amountoutstanding of about 20 trillion yen in total, 7.5 trillion yen for each)• Further active purchases of JGBs and T-Bills (Y80 trn guideline for the increase of JGB outstanding per year
removed)13

How Japan's inflation differs from other DMs
and whether it can be sustainably highA brief history of ultra-easy monetary policyby the Bank of Japan under Kuroda
governorship
Changes likely to be made under Governor
Ueda

Outlook for BOJ monetary policy
14

BOJ still expects some distance remaining towardsustainable 2% inflation
 BOJ’s median core inflation forecast for FY25 remains +1.6% y-y
BOJ’s core inflation forecasts in Outlook Reports(y-o-y, %)
3.5

FY19

3.0

FY16

2.5
2.0
1.5

FY22

FY18

FY15

FY21
FY14
FY23

1.0

-1.0

FY13
FY20

FY12

Jan-13Apr-13
Jul-13Oct-13Jan-14Apr-14Jul-14Oct-14Jan-15
Apr-15
Jul-15Oct-15Jan-16
Apr-16
Jul-16Oct-16
Jan-17
Apr-17
Jul-17Oct-17Jan-18Apr-18
Jul-18Oct-18Jan-19Apr-19Jul-19Oct-19Jan-20
Apr-20Jul-20
Oct-20Jan-21
Apr-21
Jul-21
Oct-21
Jan-22
Apr-22
Jul-22Oct-22
Jan-23Apr-23
Jul-23

-0.5

FY25

FY17

0.5
0.0

FY24

(BOJ Outlook Report release dates)
Note: Excluding the impact of consumption tax hike and free education
Source: Nomura, based on BOJ data

15

Rationale behind July 2023 Policy Tweak BOJ raised de facto upper limit of 10y yield to 1.0%
 This does not really mean the Bank will allow 10y yield to reach there
Conduct of Yield Curve Control (YCC) with Greater Flexibility

Abstract of July 2023 Monetary Policy Meeting Statement

 Taking account of extremely high uncertainties for economic activity and prices, it is appropriate for the Bank toenhance the sustainability of monetary easing under the current framework by conducting yield curve control withgreater flexibility and nimbly responding to both upside and downside risks to Japan's economic activity and prices.
 If upward movements in prices continue, the effects of monetary easing will strengthen through a decline in realinterest rates, while on the other hand, strictly capping long-term interest rates could affect the functioning of bondmarkets and the volatility in other financial markets. Such effects are expected to be mitigated by conducting yield
curve control with greater flexibility.
Source: Nomura, based on BOJ

16

How Japan's inflation differs from other DMs
and whether it can be sustainably highA brief history of ultra-easy monetary policyby the Bank of Japan under Kuroda
governorship
Changes likely to be made under Governor
Ueda

Outlook for BOJ monetary policy
17Conclusion

Our conclusion ; It will still take some time to see evidence that wage increases andchanges in corporate price-setting behavior are sustainable.

 In the wake of its decision on 28 July to become more flexible in its
conducting of YCC, we think the BOJ is starting to show readiness for thelifting of monetary easing if it is driven to do so because of higher-thanexpected inflation.

 As for the complete scrapping of YCC, our main scenario is that it will

come no sooner than Oct–Dec 2024, as we think the BOJ will at least wait
to make sure wage increases and improvement in the underlying
economy are sustainable.
18

Thank you very much for your attention!

19

Appendix A-1
Analyst Certification
I, Takashi Miwa, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report,(2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any
specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

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