The Bank of Japan must continue buying assets aggressively to sustainably achieve its 2 percent inflation target, while keeping an eye on risks, such as disrupting the bond market and fuelling asset bubbles, the OECD said on Wednesday. The global think tank also warned that without a credible plan to rein in its huge public debt, Japan may face a bond market sell-off that could hit banks with huge bond holdings.
Aggressive purchases by the BOJ, which now holds a quarter of Japan’s government bond market, have kept borrowing costs low but that will not last indefinitely, leaving the country vulnerable to rising interest rates, the Organisation for Economic Cooperation and Development (OECD) said.
“The outlook for the government bond market will be more uncertain once the BOJ achieves its inflation target” and phases out its quantitative and qualitative easing (QQE) stimulus program, it said in report on recommendations for Japan. The Paris-based body estimated that without further fiscal reforms, Japan’s government debt will exceed 400 percent the size of its economy by 2040, double the current ratio.
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