As Japan’s economy strengthens, markets will look for overt and subtle signs of monetary policy change at the Bank of Japan.

In Japan, the economy seems to be improving. First-quarter industrial production looks strong, and business confidence is rising. Most strikingly, a recent batch of labor market statistics showed unemployment falling to 2.8% in Japan, its lowest level since 1994. Our Nowcast reveals the steady improvement. And while inflation doesn’t appear to be rising particularly quickly, the Bank of Japan (BOJ) continues to express confidence in the inflation outlook.

We think that Japan is responding to the global pickup, rather than being in the vanguard of it, following its normal pattern of export-led growth. In other words, we interpret Japanese growth as a symptom of the better global environment.

How will policymakers react to stronger growth?

At the moment, Japanese capital outflows are critical in keeping downward pressure on global interest rates. A change in BOJ policy, which could be triggered by robust domestic price pressures, would likely translate into higher interest rates around the globe. The key issue is whether the growth and inflation outlook are enough to prompt a change in BOJ policy. The Japanese government bond (JGB) market seems to have lost interest, for now, in challenging the BOJ’s decision to hold 10-year yields around 10 basis points, and it is clear the BoJ is taking advantage of this to buy less. Inevitably, this is being seen by some analysts as indicating a reduction in the pace of quantitative easing: The term “stealth tapering” is being used in Tokyo to describe this dynamic.

We think that Japan is responding to the global pickup, rather than being in the vanguard of it, following its normal pattern of export-led growth.

Our view is that when a central bank has committed to an interest-rate target, then the quantities of bond purchases become irrelevant. Buying less tomorrow means you have space to buy more the day after, if you need to do so. In other words, the BOJ is doing the least it has to in order to keep JGB yields where it wants them, and it would not make a lot of sense for them to do more. We see no immediate prospect of a change in policy. While the BOJ sees inflation reaching 1% by the end of this year, this is still well short of the 2% target. A major acceleration in growth and inflation pressures would be needed to push the BOJ to change its policy in coming months.

Of course, in a year’s time, Governor Haruhiko Kuroda’s term ends, and he’ll be 73 years old. A change in governor could easily bring a change in policy, just as Kuroda himself did. It would not be at all surprising for a “new,” post-Kuroda BOJ to abandon the 2% CPI target and declare itself happy with a 1% target. We are not likely to have to wait a year before we know which way the wind is blowing, and this will matter for the global rate outlook.

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As the domestic U.S. policy outlook dims, markets take their cue from more substantive signs of change.