MNI INTERVIEW:BOJ Should Drop Yield Control Soon-Ex Deputy Gov

The Bank of Japan should move quickly to remove yield curve control, but keep short-term policy rates negative, former deputy governor Hirohide Yamaguchi told MNI, arguing that it will become too hard for the BOJ to keep control of bond markets as expectations build of rising inflation.

Yamaguchi, who has in the past called for a relaxation of yield curve control by widening the target for the 10-year rate, said in an interview that while yields could rebound if the framework is lifted, the BOJ would still have many tools to stabilise markets. Such a move would leave long-term interest rates up to the market, but would not imply either monetary tightening nor monetary easing, he said.

“I believe the BOJ is in the phase of taking some policy action, instead of being static. The BOJ must not stand still. Instead of worrying about all the challenges , the BOJ must make up its mind and act. That is becoming more necessary than ever,” he said, adding that the Bank’s surprise widening of its yield curve band in December showed that it was already losing power to control the market.

“When the BOJ widened the 10-year target band to correct distortions in the markets in December, it did so because it could not substantially control [the 10-year interest rate]. It’s becoming apparent. That’s how I see it.”

HARDER TO CONTROL

Nonetheless, while other former BOJ officials have said it is likely the BOJ could loosen yield curve control parameters in coming months, MNI understands that the Bank’s current leadership is determined to keep the overall framework for this year at least. (See MNI POLICY: BOJ To Keep Yield Curve Control This Year)

“If we have any changes to the zero interest-rate environment, it will become harder for the BOJ to control long-term interest rates,” said Yamaguchi, chairman of Nikko Research Center and BOJ Deputy Governor between 2008-2013.

Still, a removal of yield curve control would not equate to policy tightening, and the BOJ should maintain its short-term policy rates at negative levels in order to meet its price objectives, he said.

“The more uncertainties the BOJ has, the more flexible and nimble policy stance [it] must have, based on its standard economic outlook scenarios and risk analysis.”

Price rises, initially triggered by imported inflation, have now spread to domestic inflation accompanied by wage hikes, Yamaguchi said, speaking after data showed May core inflation remained well above target.

“Price hikes after last spring were the first wave, the second wave occurred last autumn and the price hikes this spring were the third wave,” he added. “In other words, homemade inflation is spreading.”

Consumer inflation expectations have reached extremely high levels and a labour shortage seems to be feeding a wage-price spiral, he said, adding that the chances were rising that the BOJ’s expectation that core inflation will decline after the middle of this fiscal year will be proved wrong.

“In any case, the prospect of stable 2% inflation is coming into sight as the year-on-year increase in core CPI has stayed above 2% since April [2022],” he said.