Towards Japan’s financial normalisation?

Traditionally, Japan’s stark financial isolation resulted in very little financial integration between it and the rest of the world. As a result, the yen’s exchange rate was not very correlated with the yield spread between Japan and the rest of the world. Today, however, the contrast between Japan’s monetary policy and that of other OECD countries has led to a sharp depreciation of the yen. Th is comes at a time when the Bank of Japan has kept yield curve control in place while the other central banks (Federal Reserve, ECB, Bank of England) have begun rolling out restrictive monetary policies and dollar, euro and pound sterling long-term interest rates have risen quite rapidly. But the yen’s reaction to this monetary policy (interest rate) gap suggests that Japan may now be much more integrated with the rest of the world and that there is much more arbitraging between financial assets in yen and those in other currencies. This is a major development that will reduce Japan’s monetary autonomy.