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The key challenge facing the Bank of Japan (BOJ) is how to durably achieve its inflation target without significantly overshooting while safeguarding financial stability, an article written by Purva Khera and Salih Fendoglu, IMF economist for Japan, and Salih Fendoglu, senior financial sector expert in the monetary and capital markets department, on the IMF website noted.
“As the only major central bank with a negative interest rate, set at minus 0.1 per cent, monetary policy remains ultra-accommodative with rising inflation,” the authors noted.
Japan has been the world’s largest net creditor for more than three decades, with external assets of $3.2 trillion, as years of low interest rates drove foreign investment to achieve higher yields. That means, the authors say, rising government bond yields could lure investors back to domestic assets and help to attract more investment from outside the country.
That could hurt the valuation of overseas assets and put upward pressure on global yields by fueling foreign sales by Japanese or purchases of Japanese assets by foreigners, they observed.
Such spillover effects would likely be larger in countries where Japanese investors own a large share of local debt; these include several euro area countries, Australia and the United States.
“Clear communication of any changes to Japan’s monetary policy stance will be critical to mitigate potential unintended consequences and heightened market volatility,” they said.
Ultimately, monetary easing will need to be supported by other policies for Japan to finally achieve its 2 per cent inflation target sustainably, they said.
This includes withdrawal of pandemic-related fiscal support, with any new measures limited and targeted to vulnerable households only, to avoid overheating the economy.
It will also help boost personal income and purchasing power. “Overcoming such structural barriers to wage growth will make it possible for the country to enjoy the benefits of a virtuous cycle of income and growth,” they added.
Fibre2Fashion News Desk (DS)