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Some at BOJ are said to flag need for future normalisation talks

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A small shift is taking place in internal discussions among Bank of Japan (BOJ) policy makers, with a minority raising the need to eventually start discussing policy normalisation, even though they agree the current stimulus program must continue unchanged for some time, according to people familiar with talks at the central bank.

[TOKYO] A small shift is taking place in internal discussions among Bank of Japan (BOJ) policy makers, with a minority raising the need to eventually start discussing policy normalisation, even though they agree the current stimulus program must continue unchanged for some time, according to people familiar with talks at the central bank.

Some of them think the change is natural given the improvement in the economy, according to the people, who declined to be named because discussions are private. Japan's extended economic recovery and a slow but steady rise in inflation are creating the need in the medium-term to at least begin talking about normalisation, the people said.

BOJ officials caution that the market's expectations for policy normalisation have moved well ahead of their own. They see a long way to go before the BOJ's two per cent inflation goal is reached, noting that excluding energy prices, inflation is far weaker than even the 0.9 per cent registered by the core gauge in November, the people said.

With the Japanese economy on solid footing, investors have begun to wager that the BOJ is about to join its global peers and begin unwinding its extraordinary monetary stimulus, particularly after a tweak to the central bank's purchases of long-dated bonds on Jan 9.

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BOJ officials have stressed that the reduced bond buying carried no policy implications. Bond purchases remain in line with a policy shift made in September 2016, when the BOJ changed its priority from the quantity of asset purchases to controlling interest rates, they said.

BOJ Governor Haruhiko Kuroda has repeatedly said that it's too early to talk publicly about possible exit strategies because the central bank remains so far from its inflation target. He said any such discussions would likely confuse markets.

Some of the people familiar with talks at the central bank pointed signs of small changes in the thinking of some BOJ policy members in the summary of opinions from the most recent policy meeting, on Dec 20-21. The summary of opinions don't necessarily represent a consensus or even a majority view of board members, and don't identify people by name.

One point in the summary was a nod to the prospect of higher interest rates on the horizon.

"When it is expected that economic activity and prices will continue to improve going forward, the situation may occur where the Bank will need to consider whether adjustments in the level of interest rates will be necessary," the summary cited one board member as saying. The policy maker noted "strengthening the sustainability" of the policy framework as a possible goal.

The December summary noted for the first time, in reference to the central bank's purchase of risk assets like exchange-traded funds, that "stock prices and corporate profits have substantially improved". This appears to indicate that at least one member thinks the need to lower risk premiums through the asset purchases is fading.

BOJ officials also see a possibility that the central bank won't cut any inflation forecasts when it releases its quarterly outlook after its next two-day policy meeting, which ends Jan 23. That would be the first time in nearly four years.

Most economists surveyed by Bloomberg forecast no changes to policy settings next week.

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