The International Monetary Fund on Friday urged the Bank of Japan to consider ending its stimulus policies, which include controlling the yield curve and massive asset purchases, and gradually raising short-term interest rates, as the possibilities increase that the bank will change its ultra-loose monetary policy in the near future.
The International Monetary Fund explained that the Japanese economy is witnessing a continuous recovery, and that domestic demand has become the main driver of inflation instead of rising costs of imported goods, with the gap resulting from the decline in production and the intensification of the labor shortage shrinking.
The fund added that core inflation measures show that the current rise in prices, which exceeds the Bank of Japan’s 2 percent target, is an all-encompassing rise that includes various products and services for the first time in three decades.
“The Bank of Japan has been appropriately cautious, given Japan’s history of deflation and the mixed signals from recent data. However, upside risks to inflation have materialized in the past year,” the IMF said.
Also, the Fund expected that the continued narrowing of the output gap and rising wages would keep “core inflation” (excluding the effects of food and energy prices) above the Bank of Japan’s target of 2 percent until the second half of 2025.
“The focus now should be on tightening fiscal policy and turning the page on unconventional monetary easing policies, while maintaining the stability of the financial system,” the Fund said in a statement following its annual policy consultations with Japan.
With inflation above 2 percent for more than a year, the Bank of Japan has begun paving the way for the end of a complex stimulus program that includes:
– A massive asset purchase program known as “quantitative and qualitative easing” (QQE).
– Negative short interest rates.
Yield curve control (YCC): A policy that caps long-term interest rates near zero.
Many market participants expect the Bank of Japan to end negative interest rates this year, and a Reuters poll estimates that April is the most likely date.
“The Bank of Japan should consider ending the YCC and QQE policies now with a gradual hike in short-term interest rates thereafter,” the IMF said.
The statement added that when the central bank exits its tight accommodative policies, it must provide a “clear and effective” explanation that any increases in interest rates will be gradual and cautious in terms of timing.
He explained that the Bank of Japan may also continue to reinvest maturing government bonds on its balance sheet to avoid market disruptions.
The International Monetary Fund criticized government energy subsidies in Japan, as well as the government’s plan to provide almost universal income tax cuts, describing them as “unjustified” given the recovery of the Japanese economy and the high debt-to-GDP ratio.
The Fund explained that due to the nature of the temporary subsidies and the lack of Japanese families’ tendency to consume, the non-targeted income tax reduction is expected to have a limited impact on economic growth.
The IMF added, “In addition, energy subsidies can distort energy consumption and hinder carbon emissions reduction initiatives, and should be replaced by targeted transfers to lower-income households.”
2024-02-10 22:32:43
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