*
Tweak to YCC may affect markets via FX, term and risk
premiums
*
YCC tweak may affect Australia, euro-zone, U.S. yields -
IMF
*
Emerging market yields may be affected by fund
repatriation
*
BOJ must offer clear communication when adjusting policy -
IMF
(Adds details on market impact of YCC tweak)
By Leika Kihara
TOKYO, April 12 (Reuters) - The Bank of Japan could help
prevent abrupt policy changes later by allowing more flexibility
in its bond yield curve control, the International Monetary Fund
said in its global financial stability report released on
Tuesday.
Under yield curve control (YCC), the BOJ guides the 10-year
government bond yield around 0% as part of efforts to
sustainably achieve its 2% inflation target.
The central bank's decision in December to widen the
tolerance band around the yield target has heightened market
bets of a further near-term tweak or end to YCC.
Changes to the BOJ's yield control policy may affect
financial markets through exchange rates, term premiums on
sovereign bonds and global risk premiums, the IMF said.
"While allowing more flexibility in the yield curve control
policy could have some repercussions in global financial
markets, such a change not only is warranted to meet monetary
policy objectives but could also help prevent abrupt policy
changes later that could trigger larger spillovers," the IMF
said in the report.
The BOJ has kept policy ultra-loose even as other major
economies hiked interest rates to combat soaring inflation, on
the view the recent cost-driven price growth won't be sustained
unless accompanied by stronger economic and wage growth.
While the yield control policy has helped keep borrowing
costs low, it has come under increasing criticism for distorting
market pricing and crushing financial institutions' profits.
The BOJ's new governor, Kazuo Ueda, stressed on Monday his
resolve to keep ultra-low interest rates for now, brushing aside
lingering market expectations of a near-term policy shift.
In the report's section analysing the potential impact of a
tweak to YCC, the IMF said a further rise in Japanese long-term
interest rates could affect bond yields of Australia, several
euro-area countries and the United States as Japanese investors
repatriate the huge amount of funds parked in these markets.
Some emerging markets like Indonesia and Malaysia could also
face "material" capital outflows due to the significant presence
of Japanese investors, it said.
"The pace and possible effects of repatriation could be
larger, however, should market participants be surprised by the
Bank of Japan's announcements and actions," the report said.
"Clear communication in the event of adjustments to the Bank
of Japan's monetary policy is critical to avoid market
volatility," it said.
(Reporting by Leika Kihara; Editing by Shri Navaratnam and Sam
Holmes)
