The International Monetary Fund (IMF) has advised the Bank of Japan (BOJ) to shift from yield curve control and prepare for future monetary policy tightening. For now, BOJ should maintain low short-term interest rates, but allow longer-term yields to rise flexibly. This prevents the need to buy an unlimited amount of bonds, avoiding distortions in the Japanese bond market. Clarity in policy communication to markets is also encouraged.
Rising inflation in Japan, reaching a 20-year high, has pressured the BOJ to tighten monetary policy. However, BOJ resisted, emphasizing the need for low interest rates to support economic growth. The IMF’s call signals growing international concerns about Japan’s ultra-loose monetary policy.
Key reasons for IMF’s urging to abandon yield curve control are:
- Distorted Japanese bond market: The BOJ’s commitment to near-zero 10-year bond yields increased demand but hindered fund-raising for Japanese companies and future balance sheet unwinding.
- Difficulty in controlling inflation: Yield curve control obstructs raising long-term interest rates, vital for boosting inflation to the 2% target.
- Communication challenges: Commitment to near-zero 10-year bond yields complicates signaling of future tightening, causing market uncertainty and hindering business planning.
This IMF call is significant, as it publicly criticizes BOJ’s monetary policy. It could pressure BOJ to reevaluate its stance. The impact of BOJ’s decision remains to be seen, but the call shows international unease regarding Japan’s ultra-loose monetary policy.
