The Bank of Japan (BOJ) should conduct a comprehensive review of its policy objectives and redefine its elusive 2 percent inflation target as a long-term goal with room for some allowance, a staff report by the IMF said.
The move would make the price target more realistic and give the central bank flexibility to address the strain prolonged monetary easing is inflicting on financial institutions, according to the report released in Washington on Monday.
“The BOJ should clarify that it is not excessively focused on inflation, but that other objectives, including financial stability, also matter for monetary policy,” it said.
Years of heavy money printing has failed to fire up inflation to the BOJ’s 2 percent target, forcing it to maintain a radical stimulus, despite the rising cost, such as the hit to commercial banks’ profits from ultra-low interest rates.
Under a policy dubbed yield curve control, the BOJ guides short-term rates at minus-0.1 percent and 10-year bond yields at about zero percent. It also buys government bonds and risky assets to reflate growth.
While the bank no longer sets a rigid time frame for reaching the target, BOJ Governor Haruhiko Kuroda has shunned calls to water down his pledge to meet the price goal as early as possible.
The large weight the BOJ puts on the inflation target and its overoptimism in meeting the goal have hurt its credibility, as price growth remains anemic, the report said.
“The emphasis on achieving the price stability target ‘as soon as possible,’ together with unrealistic inflation forecasts, have been particularly problematic given limited policy space, a clogged monetary transmission, and rising financial stability costs,” it said.
Japan’s annual core consumer inflation in December last year hit 0.7 percent.
The BOJ expects inflation to come in at 1 percent in the year beginning in April and accelerate to 1.4 percent the following year — forecasts criticized by analysts as too ambitious.
The IMF report was compiled after the global lender’s Article 4 consultations with Japan.
Meanwhile, a senior IMF official warned that a prolonged and widespread 2019 novel coronavirus outbreak could hit Japan’s economy, affecting tourism, retail and exports, among other areas.
“The spread of coronavirus poses an emerging downside risk to Japan’s economy, although the economic impact will depend on the extent of the spread of the disease and policy responses,” IMF mission chief for Japan Paul Cashin told reporters.
“If prolonged and widespread, this would likely affect Japan’s tourism and retail activities through a decline in tourist arrivals, and spending from China and elsewhere,” he said in a written interview released yesterday.
The outbreak could also affect trade and investment, as any further slowdown in China’s economy could hurt Japanese companies’ output and disrupt supply chains, Cashin added.
Cashin did not give estimates on how much the outbreak could affect Japan’s growth, saying the effect would be taken into account when the IMF next updates its global forecasts in April.
The coronavirus outbreak, which began in China, has heightened concern among Japanese policymakers that the world’s third-largest economy — already hurt by soft global demand and private consumption — could slide into recession.
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