TOKYO : The Bank of Japan should let government bond yields move more flexibly and be ready to raise short-term interest rates swiftly if"significant" upside risks to inflation materialise, the International Monetary Fund said on Thursday.
With Japan's core consumer inflation at a 41-year high 4 per cent, double the BOJ's target, markets have been betting the central bank will phase out its aggressive stimulus when dovish Governor Haruhiko Kuroda retires in April. "Given the two-sided risks to inflation, more flexibility in long-term yields would help to avoid abrupt changes later. This would help better manage inflation risks and also help address the side-effects of prolonged easing," the IMF said.The IMF said the BOJ could also consider options such as targeting a shorter-term yield or the pace of its bond buying.
The BOJ doubled its allowance band for the 10-year yield in December to 0.5 per cent above or below zero. It beefed up a market operation tool in January to defend the new cap, aiming to extend YCC's lifespan.
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