BOJ May Have to Adjust Yield Cap if Inflation Rises

On Wednesday, a former executive of the central bank stated that if inflation continues to exceed the forecast of the Bank of Japan (BOJ), it may have no other option than to make adjustments to its ultra-easy monetary policy. This would include using a looser reference range to replace the yield cap for long-term interest rates.

No adjustment next month

A former executive of the BOJ, Hiromi Yamaoka has remained in close contact with some of the policymakers of the central bank. He said that the policy review in the next month of the BOJ would not see any changes made to the interest rates. However, he added that the central bank may have no choice but to make adjustments within a year.

This would be needed if inflation, which is currently only evident amidst the limited range of imported products, widens. The former executive said that unconventional monetary policies exist and some of them can be hard to exit, with the yield cap of the central bank being one of them.

As he is familiar with the operations of the Bank of Japan, he said that it needs to come up with policy ideas in the event that inflation exceeds its forecast. He said that if the public believes the central bank cannot control inflation, it will lose its credibility.

YCC remains unchanged

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The Bank of Japan uses a policy known as yield curve control (YCC) in which its target is to keep yields of 10-year government bonds at 0% and they have a cap of 0.25%. This has made the Japanese central bank an outlier because like other global central banks, it has not increased interest rates in order to fight inflation.

Haruhiko Kuroda, the governor of the Bank of Japan, is of the view that inflation is not going to last, so they are not prepared to make adjustments to the YCC. The most recent forecast of the Japanese central bank was that consumer prices would be higher by 1.9% in the fiscal year leading to March 2023 as opposed to the fiscal year 2022.

Economists, on the other hand, had predicted a rise of 2.1%. According to Yamaoka, there is a strong possibility that inflation would be higher than the BOJ’s forecast, as the latter has assumed that there will be slower growth in price this year.

Prices are rising

Consumer prices in May turned out to be 2.1% higher than last year, particularly with a 0.2% annual rate seen in January. This was primarily due to the rise in commodity and fuel costs. Yamaoka said that if inflation continues to go up, the BOJ would have to come up with the least disruptive way of dealing with the YCC.

One way it can accomplish this goal is by using a looser reference range to replace the 0% yield target and deciding to intervene if there is an excessive increase in rates. He said that the central bank also needs guidance from the market about its future interest rate course.

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