IMF official: Bank of Japan should consider further measures

The International Monetary Fund logo is seen outside the headquarters building during the IMF World Bank spring meeting in Washington, U.S. April 20, 2018. REUTERS Yuri Gripas

TOKYO, Jan 28, Reuters - The Bank of Japan should consider further measures to make its ultra-easy monetary policy more sustainable, such as a steepening of the yield curve by targeting a shorter maturity than the current 10 year yield, an International Monetary Fund executive said.

Such a move would be a result of measures taken by the central bank in March last year to mitigate the effects of prolonged easing, such as allowing 10 year yields to move more widely around its 0% target.

The BOJ must clearly communicate that it will be aimed at enhancing the effect of its ultra-easy policy, not at withdrawing the stimulus, said Odd Per Brekk, deputy director of the IMF's Asia and Pacific Department.

Inflation in Japan will be in the 1% range over the next few years, which is less than the target of the BOJ, he said.

In an interview conducted on Thursday, the BOJ should continue its accommodative monetary policy stance, he told Reuters.

Under yield curve control YCC, the BOJ guides short-term interest rates at - 0.1% and the 10-year bond yield around 0% via huge asset buying to push inflation to its 2% target.

While low borrowing costs have helped companies, they have been criticised for crushing the margin financial institutions earn from lending and draining bond market liquidity.

We think YCC has been successful. It has worked well. Brekk said that there had been some adverse side-effects on the financial sector.

Building on the steps taken in March, the BOJ could make its stimulus programme more effective by shifting the target to a shorter duration than the current 10 year yield, he said.

It's something to consider if you need to strengthen policy or respond to shocks by ramping up the stimulus, Brekk said.

He said that Japan will see inflation momentum build up this year as consumption rebounds and companies can pass on some of the higher costs to households, despite the recent rise in food and energy costs.

Inflation will be short of the 2% goal of the BOJ in the medium term, which requires the bank to maintain current stimulus.

Brekk said that in order to get inflation to 2% of the 2% target, a policy strategy needs not only monetary policy but flexible fiscal policy and measures to boost Japan's potential growth.