June 14, 2024

BOJ Poised to Stand Pat on Rates But Pivot Towards Policy Normalization Expected in 2023

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Dec 18, 2023

The Bank of Japan (BOJ) is set to conclude its two-day monetary policy meeting on Tuesday, where it is widely expected to maintain its ultra-loose monetary policy stance. However, there are growing expectations that the central bank could pivot towards policy normalization at some point in 2023.

BOJ Likely to Maintain Status Quo for Now

The BOJ is forecasted to keep its key short-term interest rate at -0.1% and the 10-year Japanese government bond yield target at around 0% at this week’s meeting (ForexLive). The central bank has maintained this ultra-loose policy setting for years in an effort to stimulate inflation and economic growth.

However, there is pressure mounting both domestically and internationally for the BOJ to follow other major central banks in pivoting towards policy normalization. The Federal Reserve and other central banks have been aggressively hiking rates to combat high inflation, causing the yen to weaken significantly against the US dollar.

A weaker yen has driven up import costs in Japan, putting further pressure on the BOJ to adjust its dovish policy stance. Japan’s core consumer price index recently hit a 41-year high of 3.6% in November, above the central bank’s 2% target (Reuters).

Growing Calls for BOJ to Normalize Policy Soon

While a policy adjustment is not expected this week, there are growing calls for the BOJ to normalize its ultra-loose monetary policy in 2023 from Japanese politicians and business leaders.

Masakazu Tokura, head of Japan’s biggest business lobby Keidanren, said on Monday that the BOJ must normalize monetary policy “as soon as possible” to address the weak yen and rising living costs (ForexLive). He warned that further yen declines could destabilize the Japanese economy.

“If current monetary policy continues, the Japanese economy may fluctuate further and management instability intensify among companies,” Tokura said.

Similarly, Fumio Kishida’s administration has increased pressure on the BOJ to move away from its ultra-loose policy given the economic turmoil it is causing.

BOJ 2023 Policy Normalization Path Still Unclear

While there is growing consensus that the BOJ will need to normalize policy at some point in 2023, the specific timing and path remain unclear.

Over 20% of economists surveyed by Reuters predict the BOJ could phase out its loose monetary policy as soon as January (WKZO). However, BOJ Governor Haruhiko Kuroda has consistently pushed back against rapidly tightening policy.

The central bank is caught between rising inflationary pressures domestically and major risks to Japan’s economic recovery if policy is tightened too quickly. As such, any normalization of policy is expected to be gradual.

In its quarterly outlook report last month, the BOJ maintained its view that short- and long-term interest rates would remain at “present or lower levels” at least through spring 2023 (Bloomberg). This suggests that the ultra-loose monetary policy will remain in place into early 2023.

Markets Cautious Ahead of BOJ Decision

Asian shares were slightly lower on Monday ahead of the BOJ’s policy meeting on Tuesday. Japan’s Nikkei 225 fell 0.2% to close at 27,842.33 (Yahoo Finance) as investors awaited cues from the BOJ on the future path of monetary policy.

Similarly, the U.S. dollar was little changed at 136.68 yen (Reuters) as forex traders hesitated to take big positions prior to the BOJ decision.

Markets are cautious given the potential for the BOJ meeting to increase volatility if there are any surprise policy changes or if the central bank signals a hawkish pivot for 2023.

Outlook for BOJ Policy Adjustment in 2023

While the BOJ is set to stand pat on monetary policy for now, the central bank is likely to end its negative interest rate policy by the first half of 2023, according to economists. The BOJ is reportedly even considering lifting its negative rate as soon as January (Yahoo Finance).

However, the timing and magnitude of any BOJ policy tweaks remain uncertain. The path towards normalization will depend heavily on inflation trends, currency moves, and global central bank policies over the next six months.

In particular, markets will be closely watching whether the Fed pauses or slows interest rates hikes in early 2023. If the Fed signals a dovish tilt, it could alleviate pressure on the BOJ to rapidly normalize policy.

Ultimately, while the BOJ is set to stand pat for this week’s policy meeting, all eyes will be on how Kuroda guides expectations for potential policy tweaks next year amid building economic strain from the weak yen.

Impact on Japanese Markets

Financial markets could see increased volatility if the BOJ adjusts its policy stance earlier than expected or provides hawkish forward guidance this week. In particular, further yen weakness and swings in Japanese equity markets could occur if investors interpret BOJ communications as likely leading to reduced stimulus.

Conversely, if Kuroda affirms the BOJ’s commitment to maintaining ultra-loose monetary policy for the foreseeable future at this week’s meeting, it could provide temporary relief to Japanese markets. However, delaying policy normalization would risk intensifying economic strains over the medium term.


While no major policy changes are imminent at the BOJ’s December 19-20 meeting, the central bank appears to be laying the groundwork for potential normalization of its decade-long quantitative easing program in 2023 amid mounting economic pressures.

Kuroda is likely to use this week’s post-meeting communications to push back against rapid tightening while dropping hints about the future policy path. Markets will be parsing his language closely for clues on the BOJ’s policy outlook, which could increase volatility across Japanese equities, bonds, currency, and other asset classes.




AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.

By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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