IMF calls on BOJ to keep rates low as inflation returns

IMF calls on BOJ to keep rates low as inflation returns

The IMF calls on the Japanese government to keep rates low and be ready to shift course.

TOKYO Reuters - The Bank of Japan must maintain monetary policy ultra-loose, as it will take time to re-anchor inflation expectations to its 2% target, Gourinchas, the chief economist of the International Monetary Fund, told Reuters.

But the central bank must be vigilant about the risk of price growth overshooting expectations and be ready to tighten policy if inflation stays above its target for too long, he said.

There is an opportunity right now to re-anchor inflation expectations at the central bank's target, with underlying inflation exceeding 2% and wages starting to rise, Gourinchas said in an interview conducted on Tuesday.

It will take a lot of time, he said. It won't happen overnight, but Gourinchas said the public must be convinced Japan won't fall back to deflation.

While interest rates are generally low, the Bank of Japan must keep an eye on the circumstances of other central banks that struggle to tame high inflation.

In the past two years, the history of inflation that was supposed to be transitory turned out to be not transitory, Gourinchas said.

In Japan, we could have similar dynamics. If inflation continues to increase, there's a need to be vigilant and to be ready to tighten monetary policy. Japan's core consumer inflation reached 3.4% in April, staying ahead of the BoJ's target for a year, keeping alive speculation the BOJ could phase out its massive stimulus that critics say is distorting markets.

Viewing inflation as driven mostly by cost-push factors, Governor Kazuo Ueda has ruled out an early end to yield curve control YCC - a policy that establishes a - 0.1% limit on short-term rates and a - 0.5% cap on the 10-year bond yield.

Given the likelihood of inflation remaining elevated, the BOJ should communicate to markets its readiness to address inflation risks if they arise, Gourinchas said.

He added that while maintaining YCC, it would be very difficult to tighten monetary policy due to the difficulty of determining the correct level for two rate targets.

It's probably safer to lose control of long-term yields first, he said. But then, if the need arises to tighten monetary policy, it can do so as part of the usual tightening of the policy rate, he said. The transition will be complicated, he said.