The Bank of Japan should set a long-term inflation target of 2%

FILE PHOTO. A man walks past the Bank of Japan headquarters in Tokyo, Japan. May 22, 2020. REUTERS/Kim Kyung-hoon

By Leika Kihara and Yoshifumi Takemoto

TOKYO, Jan 30 (Reuters) – A group of academics and businessmen urged the Bank of Japan (BOJ) on Monday to make its 2% inflation target a long-term target rather than one to be achieved as soon as possible, in light of the rising cost of prolonged monetary easing.

The redefinition of the price objective must be done in a new agreement on monetary policy between the Government and the central bank that replaces the one drawn up in 2013, according to the group.

In the proposal, the group also claimed the need for interest rates to rise more in line with economic fundamentals, and to normalize the functioning of Japan’s bond market.

“You have to renew the way the Bank of Japan conducts monetary policy,” Yuri Okina, a member of the group and one of the candidates to become the next deputy governor of the Bank of Japan, told a news conference.

“By making 2% inflation a long-term target, the BOJ can ease its monetary policy,” he said.

With rising commodity costs pushing inflation well above its 2% target, the BOJ has seen its ultra-loose policy come under fire from investors betting it will raise interest rates by the end of the second term. five years of Governor Haruhiko Kuroda in April, and those of his two deputy governors in March.

Nobuyuki Hirano, former chairman of MUFG Bank and a member of the group, said the Bank of Japan’s yield control monetary policy has become unsustainable as it is causing large yield curve distortions and making the bond market dysfunctional. .

“Given these distortions, we must correct the Bank of Japan’s monetary policy and make it more flexible,” Hirano told a news conference. “It is too dangerous to continue down this path.”

On Monday, Kuroda reiterated in Parliament the importance of maintaining an ultra-loose monetary policy.

“Uncertainty about Japan’s economy is extremely high. That’s why it’s important now to support the economy and create an environment where companies can raise wages,” he said.

“Japan has yet to expect inflation to stably and sustainably reach our 2% inflation target, supported by wage increases,” Kuroda said. “For this reason, we must maintain our inflation target of 2% and our ultra-lax monetary policy”

Under strong political pressure to beat deflation, the BOJ signed a monetary policy agreement with the government in 2013, pledging to reach 2% inflation “at the earliest possible date.”

With inflation surpassing the BOJ’s target, critics say the current deal has become outdated and is preventing the BOJ from phasing out its massive stimulus program.

(Reporting by Leika Kihara and Yoshifumi Takemoto; Editing by Gerry Doyle and Jacqueline Wong, Spanish editing by José Muñoz in the Gdańsk newsroom)

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