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BOJ must keep policy accommodative, for now -IMF
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Japan faces upside, downside risks to inflation
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By suppressing short-end yields, BOJ can keep supporting
growth
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Many IMF directors stressed need to avoid premature exit
(Adds details from IMF statement)
By Leika Kihara
TOKYO, March 31 (Reuters) - The Bank of Japan should
consider allowing longer-term interest rates to move more
flexibly even as it maintains ultra-loose monetary policy, a
senior International Monetary Fund official said on Friday.
The central bank can mitigate the strain on financial
institutions by allowing the longer end of the curve to move
more under its bond yield control policy, Ranil Salgado, the
IMF's Japan mission chief, said on Friday.
By suppressing the shorter end of the curve such as three to
five-year borrowing costs, the BOJ can keep offering sufficient
support to the economy even if it allows longer-term rates to
rise more, he added.
"Policy should remain accommodative for now," Salgado told
an online briefing, on Japan's monetary policy. "Our advice has
been (for the BOJ) to consider (allowing) greater flexibility at
the longer-end yields," he added.
The IMF sees two-sided risks to Japan's inflation outlook
with "upward surprises" coming from bigger-than-expected wage
hikes from companies' spring wage negotiations with unions,
Salgado said.
Downside risks mainly stem from global factors with recent
financial shocks, such as the collapse of U.S. banks, raising
the prospect of a global recession and putting downward pressure
on inflation including in Japan, he added.
Salgado made the remarks at the briefing announcing the
conclusion of the IMF's annual policy consultation with Japan.
Under yield curve control (YCC), the BOJ guides short-term
rates at -0.1% and the 10-year bond yield around 0%. Its huge
bond buying to defend an implicit 0.5% cap set for the 10-year
yield target has been criticised for distorting bond pricing and
making the market dysfunctional by drying up liquidity.
Markets are rife with speculation the BOJ could tweak or end
YCC to mitigate such side-effects when incoming Governor Kazuo
Ueda takes the helm from Haruhiko Kuroda, whose term ends in
April. The BOJ's first policy meeting chaired by Ueda will be
held on April 27-28.
In a statement on the policy consultation, the IMF said many
directors of its 24-member executive board encouraged the BOJ to
"consider options for introducing more flexibility" under YCC to
address the side-effects of prolonged easing.
"Many directors, however, stressed the need to avoid a
premature exit from monetary easing and agreed with the
authorities that maintaining the current monetary policy
framework is appropriate," the statement said.
The chance of an abrupt change of the current monetary
policy framework was among downside risks to Japan's growth
outlook, the statement added.
(Reporting by Leika Kihara; Editing by Jacqueline Wong and
Stephen Coates)
