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After two decades of deflation, over the past seven years Japan has pursued an intensive and unparalleled program of monetary easing to try to tackle deflation and kick-start economic growth. With the Japanese economy showing signs of sustained expansion, is a return to tighter monetary policy in view?

Japanese monetary policy in the past decade

Since 2013, Japan has implemented a series of extraordinary monetary policy measures. In January 2016, the Bank of Japan adopted a negative interest rate policy (NIRP) in order to stimulate economic growth and rekindle inflation. NIRP, together with quantitative easing, was meant to exert further downward pressure on interest rates across the entire yield curve, thereby encouraging financial institutions to lend and contribute to the effort in order to overcome deflation quickly.

Japanese monetary policy measures under current administration

How effective has the negative interest rate policy been?

The effectiveness of Japan’s negative interest rate policy is still being determined. There are increasingly detrimental side effects – for example, reducing the profitability of Japan’s financial institutions.

However, Japan has experienced a near record-long economic expansion, which has raised expectations for a more normalized monetary policy.

Trend in real GDP growth

The continuation of this expansion depends heavily on whether Japan can transition smoothly from overseas to domestic-led demand growth, especially given the sharp slowdown in China-bound exports.

Pros and cons of continuing Japanese economic expansion

The outlook for Japanese monetary policy

The US-China trade frictions and the potential for a global economic slowdown remain big concerns for Japan and its exporters. Any factors that may hurt Japanese export markets could delay a move to normalize Japanese monetary policy.

US interest rates are a critical factor in the outlook for Japan. A cut in US interest rates increases the risk of the Japanese yen appreciating against the US dollar, which could hurt Japan’s exporters and its financial markets.

Some industries start to lose money at 100 or lower

Will Japan return to a more normal monetary policy – and if so, when?

As major central banks led by the US Federal Reserve have adopted an increasingly dovish bias, markets expect renewed rate cuts and a prolonged period of low yields.

What action is likely on monetary policy now?

If the US Federal Reserve and the European Central Bank enter a new cycle of rate cuts, the Bank of Japan could be forced to adopt deeper negative interest rate policies, as well as measures to mitigate their side effects, in order to avoid tighter financial conditions caused by yen appreciation.

Read the full report

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About the analysts


Tetsufumi Yamakawa is a Managing Director and Head of Fixed Income Research at Barclays Securities Japan Limited. Based in Tokyo, he leads the Research group, comprising economic research, fixed income strategy, non-yen research, and FX research. Mr. Yamakawa joined Barclays in June 2010 from Goldman Sachs, where he spent 16 years primarily focusing on analyzing the Japanese economy. From 2000, he had been co-head of Pan-Asia Economics Research. Prior to joining Goldman Sachs in 1994, Mr. Yamakawa had a 15-year career at the Bank of Japan, where he was responsible for analysis of cross-border fund flows through Japanese financial institutions, analysis of monetary policy through its various channels, and organizing the international conference, hosted by the BoJ, on the central bank’s prudence policy. He holds a PhD and an MA in Economics from Brown University and Bachelor of Economics from Hitotsubashi University.

Kazuma Maeda is an economist at Barclays Securities Japan Limited. Based in Tokyo, he is responsible for analysis and forecasting on the Japanese economy and monetary and fiscal policy. Kazuma joined Barclays in 2018 from Daiwa Institute of Research, where he spent five years working as a business consultant and Japan economist. During that time, he co-authored the book Making Sense of the Global Economy 2018 (Japanese language; published in 2017 by Nikkei Business Publications, Inc). Kazuma graduated from Keio University in 2013 with a Bachelor’s degree in Economics and is a Chartered Member of the Securities Analysts Association of Japan.

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