Image: Reuters Berita 24 English - According to a former central bank executive, the Bank of Japan (BOJ) may need to modify its ultra-easy ...
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| Image: Reuters |
Berita 24 English - According to a former central bank executive, the Bank of Japan (BOJ) may need to modify its ultra-easy policy if inflation continues to surpass forecasts. One possible change would be to replace the yield cap with a looser reference range for long-term interest rates.
At its policy review next month, the BOJ will not change its interest rate targets, according to Hiromi Yamaoka, a former BOJ executive who still keeps in touch with the organization's current decision-makers. However, Yamaoka told Reuters that if inflation spreads beyond the limited range of primarily imported goods where it is currently most noticeable, the central bank may be obliged to act within a year.
The BOJ's yield cap is one of the most difficult unconventional monetary policies to abandon, according to Yamaoka, who has experience managing the BOJ's market operations.
If the public believes central banks are powerless to control inflation, he said, "the BOJ must brainstorm policy solutions in case inflation overshoots its forecast."
Under a policy known as yield curve control (YCC), the BOJ targets a 10-year bond yield of 0% with a limit of 0.25 percent, making it an outlier as other central banks raise interest rates to combat increasing inflation.
BOJ Governor Haruhiko Kuroda has shrugged away the possibility of altering YCC, believing that the current inflation rates are just temporary.
The BOJ most recent predicted that consumer prices would increase by 1.9 percent from the fiscal year ending in March 2022 to the fiscal year beginning in April. A 2.1 percent increase was forecast by economists surveyed by Reuters.
According to Yamaoka, there is a considerable likelihood that inflation will be higher than the BOJ's prediction, which is based on the notion that price increase will sharply slow down later this year.
Compared to a 0.2 percent annual rate reported in January, consumer prices were 2.1 percent higher in May. Costs associated with fuel and commodities have been a major factor in the increase.
According to Yamaoka, the BOJ must determine the least disruptive method to phase out YCC if inflation keeps rising. He suggested that one option would be to replace its 0% yield target with a looser reference range and promise to intervene if rates rose excessively.
The government needs a convincing plan on how to get Japan's finances in line, he added, and the BOJ also needs to communicate with the markets about its expectations for the future interest rate path.
The yen has fallen to its lowest level in 24 years due to the BOJ and US Federal Reserve's opposing monetary policies, which is driving up the price of imported food and fuel.
The BOJ may be forced to examine the impact of the weak yen on inflation from the standpoint of establishing price stability, Yamaoka said, even though it cannot directly target the currency in determining monetary policy.
If so, it becomes challenging to keep the 0.25 percent yield cap.
