–IMF: BOJ Then Should Gradually Raise Interest Rates
–IMF Critical of Kishida Government’s ‘Untargeted’ Economic Stimulus Package
By Max Sato
(MaceNews) – The Bank of Japan should consider unwinding its large-scale monetary easing now by exiting the seven-year-old yield curve control framework, the International Monetary Fund said Friday, noting that easing in the past decade has met its objective of keeping borrowing costs super-low and lifting inflation expectations.
“The BoJ has been appropriately cautious, given Japan’s history of deflation and mixed signals from recent data,” the IMF said in a statement at the end of its staff consultations with Japanese officials. “That said, upside risks to inflation have materialized in the past year, with strengthening nominal wages and a closed output gap.”
“The BoJ should consider exiting Yield Curve Control (YCC) and ending Quantitative and Qualitative Easing (QQE) now while gradually raising short-term policy rates thereafter,” the IMF said.
The framework, which was adopted in September 2016, has already successfully met its intended objective of lowering interest rates below the neutral rate and raising inflation expectations, it said.
“I think it is absolutely important that the Bank of Japan move cautiously and maintain a very accommodative monetary policy,” IMF First Deputy Managing Director Gita Gopinath told a news conference in Tokyo.
As for the timing of the bank’s policy shift, she said labor negotiations in March will provide a clue to how fast wages are likely to grow in fiscal 2024 starting in April, but she also stressed that the process of unwinding monetary stimulus must be “gradual” given the uncertainty over growth and inflation.
Asked if it is fair to expect the BOJ to end the yield curve control framework and lift the negative interest rate in April at the earliest, after confirming signs that wages will grow at a faster pace than a year earlier, Gopinath said, “In terms of the timing of when to raise the short-term rate, our expectation is that…if the data goes in the right direction, of course this year, that would be the right time to start.”
Gopinath was also asked about the summary of the BOJ’s meeting in January, which showed a few board members warned against falling behind the curve when discussing the need to carefully unwind the bank’s monetary easing measures.
“I believe their strategy of moving gradually and maintaining high levels of accommodation remains appropriate at this time,” she replied. “They can of course maintain very accommodative policy even if they were to raise rates by 10 basis points.”
“As of now, I don’t believe we see that there is a very high risk of being behind the curve,” she said. “I think it is important to see what the data delivers through wage negotiations and so on.”
Gopinath declined comment on how far the BOJ should raise the overnight interest rate target from the current minus 0.1%. “In terms of what the terminal rate will be, I think there is quite a bit of uncertainty around there, so I wouldn’t put a terminal rate at this point.”
At its latest meeting on Jan. 22-23, the BOJ policy board decided unanimously, as expected, to maintain its yield curve control framework and retain its guidance that it will “patiently continue with monetary easing” in order to “achieve the price stability target of 2% in a sustainable and stable manner, accompanied by wage increases.”
In a decade-long pursuit of stable 2% inflation, the board decided in a unanimous vote to keep the targets of minus 0.1% for the short-term policy rate and “around zero percent” for the 10-year bond yield, the latter of which has a flexible 1% upper limit after having been adjusted twice last year in the face of ripple effects of higher U.S. bond yields.
Under the current framework, the BOJ is keeping the 10-year government bond yield, the benchmark for long-term borrowing costs, at around zero percent by buying “a necessary amount” of Japanese government bonds “without setting an upper limit.”
“The BoJ could continue to reinvest maturing JGBs on its balance sheet to avoid abrupt shifts in bond market conditions and sharp increases in term premiums,” the IMF said.
From Jan. 27 to Feb. 7, the IMF mission met senior officials at the BOJ and government agencies including the Ministry of Finance as well as representatives of labor unions, the business community, financial sector, and academics.
After these meetings, the IMF staff concluded that the economic recovery is expected to continue in Japan and that “risks to growth and inflation are broadly balanced,” as projected by the government and the central bank.
“Growth is projected to decelerate in 2024, owing to fading of one-off factors that supported growth in 2023, including a surge in inbound tourism,” the IMF said.
“Japan’s preparedness will help mitigate the economic impact of the Noto Peninsula Earthquake,” it said, referring to the magnitude 7.6 quake that jolted the Sea of Japan coast areas in Ishikawa Prefecture on New Year’s Day, killing more than 230 people, most of them crushed under their collapsing homes, and causing damage to more than 30,000 houses. Some areas are still without water and electricity.
The IMF projected that core inflation in Japan that excludes volatile fresh food prices is expected to decline gradually as the effect of higher import prices wanes. “A closed output gap and increasing nominal wages will keep core inflation above the 2% target until the second half of 2025,” it said.
On the fiscal front, the IMF is critical of how the government of Prime Minister Fumio Kishida has been coping with the negative impact of high costs on households and businesses.
“Given a closed output gap and high debt-to-GDP ratio, the large, not-well-targeted fiscal stimulus in the November package was not warranted,” the IMF said. “Additional expenditure should have been offset by higher revenues or expenditure savings elsewhere.”
“Given its temporary nature and Japanese households’ low propensity to consume, the untargeted income tax cut is expected to have a limited impact on growth, while worsening the debt dynamics,” it said. “In addition, energy subsidies can distort energy consumption and hamper decarbonization initiatives and should be replaced with targeted transfers to vulnerable households.”