MNI BRIEF: BOJ Should Exit YCC, Raise Policy Rate - IMF Article IV

The Bank of Japan should consider exiting yield curve control (YCC) and ending quantitative and qualitative easing (QQE) now while gradually raising short-term policy rates, the International Monetary Fund’s 2024 Article IV Mission said on Thursday.

“If staff’s baseline inflation forecast bears out, the BOJ should gradually raise the policy rate over its policy horizon (i.e., three years) thereafter,” the IMF said. “The BOJ may also need to make state-contingent purchases of JGBs and implement other targeted and temporary measures to ensure sufficient liquidity support for relevant financial markets.”

The IMF warned that a clear and effective communication strategy by the BOJ that underscores factors that support a gradual and cautious pace/timing of policy rate increases will be key for a smooth transition.

A closed output gap and increasing nominal wages will keep core inflation above the 2% target until the second half of 2025, it said.