IMF urges BOJ to consider targeting short-term yields

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The International Monetary Fund logo is seen outside the headquarters building during the IMF and World Bank Spring Meeting in Washington, U.S., April 20, 2018. REUTERS/Yuri Gripas

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  • BOJ must maintain accommodative policy as inflation moves in 1% range – IMF
  • Targeting a shorter maturity to sustain recovery
  • Japan will see inflation momentum strengthen this year – IMF

TOKYO, Jan 28 (Reuters) – The Bank of Japan is expected to consider further steps to make its ultra-loose monetary policy more sustainable, such as steepening the yield curve by targeting a shorter maturity than the current 10-year rate, said the International Monetary Fund. the executive said.

Such a move would come on top of steps the central bank took in March last year to blunt the side effects of prolonged easing, such as allowing 10-year yields to move more widely around its 0% target. .

The BOJ should clearly communicate that the move would be to reinforce the effect of its ultra-easy policy, not to withdraw stimulus, said Odd Per Brekk, deputy director of the IMF’s Asia and Pacific department.

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“Unlike other advanced economies, we see inflation in Japan over the next few years moving into the 1% range, which is below the BOJ’s target,” he said.

“This means the BoJ should continue its accommodative monetary policy,” he told Reuters in an interview on Thursday.

Under control of the yield curve (YCC), the BOJ guides short-term interest rates to -0.1% and the yield on 10-year bonds around 0% via huge asset purchases to make raise inflation to its target of 2%.

Although low borrowing costs have helped businesses, they have been criticized for crushing the margin that financial institutions earn from loans and draining liquidity from the bond market.

“We believe YCC has been successful. It has worked well. But we have also seen negative side effects on the financial sector,” Brekk said.

Building on the actions taken in March, the BOJ could make its stimulus program more effective by shifting the target to a duration shorter than the current 10-year yield, he said.

“Now is not the time to do that. It’s something to consider if you need to strengthen policy or respond to shocks” by increasing stimulus, Brekk said.

While the recent rise in food and energy costs will prove temporary, Japan will see inflation momentum pick up this year as consumption rebounds and allows businesses to pass on some of the higher costs. high on households, he said.

But inflation will remain below the BOJ’s 2% medium-term target, forcing the bank to maintain the current stimulus.

“To bring inflation sustainably to the 2% target requires a broader policy strategy” consisting not only of monetary stimulus, but also of flexible fiscal policy and measures to boost Japan’s potential growth , Brekk said.

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Reporting by Leika Kihara Editing by Chizu Nomiyama

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