MNI POLICY: BOJ Could Shift 10-Yr Target To Shorter JGB - IMF

     TOKYO (MNI) - The Bank of Japan could consider shifting its JGB target from

the 10-year note to shorter maturity bonds so as to mitigate the impact of

prolonged easy policy on profits at financial institutions, the International

Monetary Fund's  2019 Article IV consultation for Japan said.

     The IMF also called on the BOJ to introduce an inflation target range,

instead of the current 2% price target, to increase the flexibility of monetary

policy.

     "The BOJ could could mitigate the impact of its prolonged accommodative

monetary policy stance on financial institutions' profitability by shifting its

zero percent YCC target from the 10-year JGB yield to a shorter maturity, while

reducing its purchases of JGBs with longer term residual maturities, which

should steepen the JGB yield curve," the IMF said.

     It also said, "Given increased attention to structural drivers of low

inflation --both global (e.g., technological progress) and domestic (e.g.,

demographic trends)--an updated assessment of the inflation level consistent

with the price stability objective could be carried out."

     "Moreover, the BOJ could consider increasing policy flexibility by

introducing an inflation range target while emphasizing the medium- to long-term

nature of achieving the price stability objective. This could allow the BOJ to

more flexibly address competing policy objectives such as financial stability,"

the IMF added.

     The IMF also warned, "Relative to one year ago, the JGB yield curve has

flattened with yields up to the 10-year maturity falling into negative

territory. This has reduced net lending margins of banks, and investment income

of insurers and pension funds, spurring them to adopt riskier asset allocations.

Financial conditions remain loose and financial stability risks are rising."

     "Japan faces a range of risks. Rising economic policy uncertainty, an

increase in financial stability risks, and consumer and investor confidence at

multi-year lows all suggest a rising risk profile," the IMF noted

     "Given the importance of manufacturing in the Japanese economy, a further

slowdown of global manufacturing would hurt Japan's exports and investment --

potentially turning into a significant downside risk to growth if the slowdown

spills over to services," the IMF said.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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