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When Will Japan Normalize Its Monetary Policy?

Markets seem to be expecting the Bank of Japan to initiate monetary-policy normalization relatively soon, with interest-rate hikes most likely beginning in April. But the normalization challenge the central bank faces this year extends well beyond deciding when to start raising rates.

TOKYO – Japan has had a difficult year so far. On January 1, as Japanese families gathered to celebrate the new year, a powerful earthquake shook the Noto peninsula, causing buildings to collapse and forcing mass evacuations. More than a week later, the death toll – already in the dozens – continues to rise, as road damage, heavy rains, and landslides impede rescuers’ ability to reach affected villages.

The next day, a Japan Airlines plane landing at Tokyo’s Haneda airport collided on the runway with a Japanese coast-guard aircraft carrying supplies for earthquake refugees. All 367 passengers and 12 crew members were evacuated safely from the burning passenger plane, but five of the six crew members aboard the smaller coast-guard aircraft died.

Then, on January 4 – the first trading day of 2024 – the Tokyo stock market declined sharply, owing to concerns about the damage from the earthquake. Although the market recovered most of the early-morning losses the same afternoon, the yen has continued to weaken against both the US dollar – falling from ¥141 to the dollar to ¥145 in 2024 – and the euro. Investors’ faith in the Bank of Japan’s readiness to normalize policy appears to be waning.