The International Monetary Fund (IMF) has urged the Bank of Japan (BOJ) to take decisive action by ending its yield curve control and massive asset purchases. The IMF suggests that as Japan’s economy rebounds, domestic demand is becoming the primary driver of inflation, prompting the need for a shift in policy.
Quoting the IMF, “The BOJ has been appropriately cautious, given Japan’s history of deflation and mixed signals from recent data. That said, upside risks to inflation have materialized in the past year.”
The global lender recommends a near-term focus on tightening fiscal policy and phasing out unconventional monetary measures while maintaining financial stability. With inflation surpassing 2% for over a year, the BOJ has been preparing to conclude its complex stimulus program.
“The BOJ should consider exiting YCC and ending QQE now while gradually raising short-term policy rates thereafter,” states the IMF, suggesting a gradual exit strategy.
IMF First Deputy Managing Director Gita Gopinath emphasizes that ending the negative interest rate policy, in place since 2016, is expected to be smooth. However, she advocates for a gradual approach to further short-term policy rate hikes over the course of several years.
In a briefing, Gopinath highlights March wage data as a crucial indicator for determining the timing of ending negative rates, pointing to potential moves sometime this year. The BOJ’s policy-setting meeting scheduled for March and April will be closely watched in this regard.
While urging a policy shift, the IMF criticizes the Japanese government’s energy subsidies and proposed income tax cuts as unwarranted given the economic recovery and high debt-to-GDP ratio. The statement emphasizes that untargeted income tax cuts may have limited impact, and energy subsidies could distort consumption and hinder decarbonization initiatives. The IMF recommends targeted transfers to vulnerable households as an alternative.
