The main challenge facing the Bank of Japan (BOJ) is how to achieve its inflation target in the long term without significantly overshooting it while preserving financial stability. The report was written by Purva Khera and Salih Fendoglu, IMF economist in Japan, and Salih Fendoglu, senior finance expert in the money and capital markets division, on the IMF website.
“As the only major central bank with negative interest rates, set at minus 0.1%, monetary policy remains extremely accommodative to rising inflation,” the authors note.
While the IMF forecasts Japan’s inflation will remain above 2% until the end of 2024, two IMF experts say the main challenge for the central bank is how to achieve its inflation target. 2% growth sustainably without significant excess and preserve financial stability. Monetary easing needs to be supported by other policies to achieve its goal in a sustainable way.
Japan has been the world’s largest net creditor for more than three decades, with $3.2 trillion in external assets, as years of low interest rates spurred foreign investment to higher yields. That means, the authors say, rising government bond yields could lure investors back into domestic assets and help attract more investment from abroad.
That could affect overseas asset valuations and put pressure on global yields by boosting overseas sales by Japanese or foreigners buying Japanese assets, they commented. .
Such spillover effects are likely to be greater in countries where Japanese investors own a large share of local debt; these include several euro zone countries, Australia and the United States.
“Clearly communicating any changes to Japan’s monetary policy stance will be important to mitigate potential unintended consequences and increased volatility in the market,” they said. school”.
Ultimately, monetary easing will need to be supported by other policies for Japan to eventually reach its 2% inflation target in a sustainable manner, they said.
This includes the withdrawal of pandemic-related financial assistance, with any new measures limited and targeted only to vulnerable households, to prevent the economy from overheating. .
It will also help increase personal income and purchasing power. “Overcoming such structural barriers to wage growth will enable the country to enjoy the benefits of a good growth and earnings cycle,” they added.
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