BOJ Deputy Governor Nakaso's speech does not suggest immediate policy normalisation - Nomura

Analysts at Nomura explained that the BOJ communications in focus BOJ Deputy Governor Nakaso showed a balanced view on the impact of monetary easing on banks’ profitability. 

Key Quotes:

"He said monetary easing is one of the factors that have intensified competition among financial institutions and exerted downward pressure on their profits. However, he also said monetary easing contributes to financial institutions’ profits via lower credit costs and increasing returns on securities investment. 

His speech focused on the low profitability of financial institutions, but discussions concentrated on structural problems, not on monetary policy. He also touched on the “reversal rate” in the Q&A session, but just said reversal rate is a useful theory for policy, as Governor Kuroda said yesterday. Mentions of “reversal rate” do not signal a near-term policy change, in our view. 

Mr Nakaso’s speech in October was seen as possibly marking the start of communications about policy normalisation by some investors. In October, He said “the Bank will make adjustments to the shape of the yield curve as necessary, while making use of the outcome of analyses and taking into account developments in economic activity and prices as well as financial conditions.” He also explained the “natural yield curve”. 

However, his speech does not suggest immediate policy normalisation is likely, in our view. Ahead of the BOJ leadership nomination, any big policy shift by the BOJ looks unlikely to us, and Mr Nakaso’s balanced stance today may reduce market speculation about near-term policy changes. 

Deputy Governor Iwata is scheduled to deliver the opening remarks at a conference tomorrow, while board member Harada is also scheduled to make a speech."