TOKYO — The Bank of Japan (BOJ) is likely to continue phasing out its massive stimulus next year starting with a tweak to its dovish policy guidance, said Nana Otsuki, a banking-sector expert and a member of a government panel on deregulation.
With inflation perking up, the job market tightening and other major central banks tightening monetary policy, it was not surprising for the BOJ to allow long-term interest rates to rise more with Tuesday’s tweak to bond yield control, she said.
Inflation could stay above the BOJ’s 2% target next year driven by solid wage growth and robust domestic demand, said Otsuki, a senior fellow at Pictet Asset Management Japan.
There was also a risk prolonged ultra-easy policy could overheat Japan’s property market, she said.
“The BOJ has little choice but to gradually head toward policy normalization,” Otsuki told Reuters in an interview on Wednesday.
By the middle of next year, the central bank will likely conduct an examination of its policy framework and tweak its dovish forward guidance to lay the groundwork for an eventual exit from ultra-loose monetary policy, she said.
The BOJ could also further widen the band around its 10-year yield cap next year, as rising inflation puts upward pressure on long-term interest rates, Otsuki said.
But the hurdle for raising the 0% target for the 10-year yield will likely be high as doing so would be tantamount to monetary tightening, she said.
“The announcement effect of changing the yield target level would be huge. The BOJ will likely to wait until it determines that an expected US recession hit bottom,” Otsuki said.
Under its yield curve control (YCC) policy, the BOJ sets a minus 0.1% target for short-term interest rates and pledges to guide the 10-year bond yield around 0%.
In a bid to breathe life back into a dormant bond market, the BOJ decided on Tuesday to allow the 10-year yield to move 50 basis points either side of its 0% target, wider than the previous 25 basis point band. (Reporting by Takahiko Wada and Leika Kihara; Editing by Christian Schmollinger)