BoJ should provide ‘more realistic’ projections – former policy board member

Claims constant overestimation of inflation expectations undermines credibility
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The Bank of Japan (BoJ) should “provide more realistic projections” regarding its inflation forecasts to allow the central bank to “restore credibility” and conduct “more accountable monetary policy”, a former policy board member states in an article to be published in the Central Banking journal.

“The BoJ’s experiment with yield curve control could work if appropriate targets and communication strategies were applied. But its current policy objectives are muddled,” says Sayuri Shirai, whose term as a BoJ board member ended in March 2016.

“As the BoJ has constantly provided overly optimistic projections and assessments since the adoption of QQE [quantitative and qualitative monetary easing], the markets and economists have become accustomed to discounting them,” she adds.

Shirai urges the BoJ to deliver “proper projections” for inflation, and says this would enable a better estimation of the duration of monetary accommodation and the actions the BoJ should undertake over that period. 

She suggests the central bank increase its 10-year yield target towards 0.5% or introduce a range of 0.0–0.5% while maintaining the negative interest rate, and apply a gradual cut in Japanese government bond (JGB) purchases – towards the net issuance amount (around ¥50 trillion, or $44.4 billion, for fiscal year 2017). 

In the monetary policy meeting in September last year, the BoJ reshaped its monetary operation by adopting ‘yield curve control’ and an inflation-overshooting commitment.

“In my view, the adoption of yield curve control was the BoJ’s response to growing criticism that had emerged since the adoption of the negative interest rate and thus to mitigate adverse impacts on financial institution,” Shirai says.

Shirai views the aims of yield curve control and a pledge of a ¥80 trillion JGB purchase target as inconsistent. She says the result is that there is uncertainty over the BoJ’s priority between these two goals and that this amplifies the potential risk of destabilising the stock and foreign exchange markets.

She says the market has reacted positively to the new framework as the yen depreciated and Japanese stock prices rose. But “once the strong optimism towards US economic policies attenuated somewhat this year, such market reactions have become less pronounced”, she adds.

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