When will Japan normalize interest rates?

It has become increasingly likely the US will begin hiking rates before end-2015 and incrementally normalize interest rates after that, but what about Japan? Given some are expecting the BoJ to ease further amid heightening concerns over the impact lower growth in China and other emerging markets and the decline in oil and other commodity prices could have on Japan's prices, economic recovery, or financial markets, such normalization will probably be a while in coming. Although the BoJ is sticking with its scenario of inflation reaching the 2% target around 1H16, many economists, see that as doubtful. Furthermore, there is a fairly wide disparity in price outlooks among BoJ Monetary Policy Board members.

On the other hand, the BoJ has continued its bazooka-like QQE for about twoanda half years, and there are doubts over how much longer it can keep it up. The BoJ is now purchasing about 90% of all new JGB issuance, increasing its holdings of long-term JGBs at an annual pace of ¥80tn that is more than double the net supply, but the number of potential JGB sellers is limited.

"With this in mind, it is not too early to consider, based on our price outlook and JGB supply-demand, the potential timing of an exit from the current monetary policy. We also try to derive the timing for interest-rate normalization priced into the JGB curve. Based on our model, the JGB curve has recently priced in about five years until interest rates start to normalize, and monetary policy is currently pushing down the 10yr JGB yield by at least 85bp",says BofA Merrill Lynch.