By Leika Kihara and Takahiko Wada
TOKYO (Reuters) – Growing risks of a world economic slowdown will likely prevent the Bank of Japan (BOJ) from phasing out its stimulus programme, a minimum of until 2024, former BOJ executive Kazuo Momma told Reuters on Thursday.
With central banks all over the world raising rates of interest to address soaring inflation, markets are rife with speculation the BOJ, too, will adjust yield curve control (YCC) and permit long-term rates of interest to rise more when dovish Governor Haruhiko Kuroda’s term ends in April next yr.
Given the rising cost of prolonged easing, the BOJ must eventually abandon YCC, which mixes a negative short-term rate goal with a zero-interest rate cap for 10-year bond yields, and revert to a policy that guides short-term rates around zero, Momma said.
However the BOJ would likely hold off on taking such steps next yr as growing prospects of a U.S. recession weigh on Japan’s export-reliant economy, he said.
“The BOJ’s next biggest challenge is to ditch YCC and negative rates, and shift to a zero-interest rate policy,” said Momma, who has experience drafting monetary policy and retains close contact with incumbent policymakers.
“That is hard to do next yr, when Japan’s economy face headwinds from slowing global growth,” Momma said. “It’s more more likely to occur in 2024, when the economy recovers and there is more clarity on whether wages would rise sustainably,” he said in an interview.
Prolonged ultra-low rates of interest have hurt the profits of economic institutions, while the BOJ’s relentless bond buying to defend its yield cap has distorted the form of the yield curve.
BOJ policymakers will likely pay more attention to such side-effects and start laying the groundwork for an eventual shift away from YCC, Momma said.
In ending YCC, the BOJ will offer no advance signals but minimise any market disruption from the announcement by offering to purchase bonds flexibly until yield moves stabilise, he said.
The BOJ can even clarify an end to YCC won’t be the beginning of full-blown monetary tightening, but a gradual shift to a more “normal” type of monetary easing, Momma said.
The timing of such a policy adjustment would depend largely on the outlook for wages and the strength of the economy, he said.
“It’s extremely essential that Japan sees a virtuous cycle where higher wages drive up inflation. Without that, it’s hard for the BOJ to hunt an exit from current policy,” said Momma, who’s currently executive economist at private think tank Mizuho Research & Technologies.
(Reporting by Leika Kihara and Takahiko Wada; Editing by Robert Birsel)
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