IMF urges BOJ to let long-term yields rise, be ready to raise rates
The Bank of Japan (BOJ) should let government bond yields move more flexibly and be ready to raise short-term interest rates switly if “significant” upside risks to inflation materialise, the International Monetary Fund (IMF) said on Thursday.
In a proposal ater an annual policy consultation with Japan, the IMF said the central bank’s ultra-loose monetary policy remains appropriate as inflation is likely to fall back below its 2 per cent target by the end of 2024 unless wages rise significantly.
But with upside risks to inflation becoming more prominent in the world’s third-biggest economy, the IMF said, the Bank of Japan (BOJ) should give long-term yields freer rein, such as by raising its 10-year bond yield target or widening the range it tolerates.
“We don’t see this as really changing the (BOJ’S) accommodative stance. It’s more to balance some of the impact on the real economy against the impact on financial markets,” IMF Japan Mission Chief Ranil Salgado said on Thursday.
“It also makes it easier to begin the transition towards an eventual raising of the shortterm rate,” he told Reuters, adding the BOJ could consider steps to enhance flexibility in bond yields even before its inflation target is durably met.
With Japan’s core consumer inflation at a 41-year high 4 per cent, double the BOJ’S target, markets have been beting the central bank will phase out its aggressive stimulus ater dovish Governor Haruhiko Kuroda retires in April.
Unlike central banks worldwide that have aggressively raised interest rates, the BOJ has stuck with an ultra-low rate policy, called yield curve control (YCC), that applies a negative interest rate to some short-term funds and targets the 10-year yield around zero.
The global lender’s proposals contrast with those it made last year, when it urged the central bank to maintain ultra-loose policy to support Japan’s recovery from the damage of the COVID-19 pandemic.
“Given the two-sided risks to inflation, more flexibility in long-term yields would help to avoid abrupt changes later. This would help better manage inflation risks and also help address the side-effects of prolonged easing,” the IMF said in a statement issued after the policy consultation. The IMF said the BOJ could also consider options such as targeting a shorter-term yield or the pace of its bond buying. Such steps, it said, would help mitigate the side effects of prolonged easing, such as distortions in the yield curve caused by the BOJ’S massive government bond purchases.
If inflation risks heighten significantly, the BOJ must withdraw monetary support more forcefully, such as by raising short-term rates “much earlier and above the neutral rate” to anchor inflation back towards its 2 per cent target, it said.