IMF urges BOJ to consider targeting shorter-term yields

“The Bank of Japan (BOJ) should consider further steps to make its ultra-easy monetary policy more sustainable, such as steepening the yield curve by targeting a shorter maturity than the current 10-year yield,” said an executive from the International Monetary Fund (IMF), per Reuters.

Odd Per Brekk, Deputy Director of the IMF's Asia and Pacific Department, crossed wires via Reuters during early Friday in Asia as the executive said, “The BOJ must clearly communicate that the move would be aimed at enhancing the effect of its ultra-easy policy, not at withdrawing stimulus.”

Key quotes

Unlike in other advanced economies, we see inflation in Japan over the next few years moving in the 1% range, which is below the BOJ's target.

This means that the BOJ should continue its accommodative monetary policy stance.

We think YCC (Yield Curve Control) has been successful. It has worked well. But we have also seen some adverse side-effects on the financial sector.

Now is not the time to do this. It's something to consider if you need to strengthen policy or respond to shocks.

While the recent rise in food and energy costs will prove temporary, Japan will see inflation momentum build up this year as consumption rebounds and allows companies to pass on some of the higher costs to households.

To get inflation sustainably to the 2% target requires a broader policy strategy.

Our preliminary assessment is that japan's current account in 2021 was in line with fundamentals, this also holds for yen exchange rate.

It's important to keep in mind BOJ's policy is focused on inflation target not exchange rates.

Exchange rates are outcome rather than target of Japan's monetary policy.

It's worth noting taht IMF Japan Chief Ranil Salgado also spoke after IMF's Brekk while saying, "If markets become volatile due to fed tightening cycle, that could have the other impact on yen due to its safe-haven status," per Reuters.

Additional comments from IMF's Salgado

Fed tightening cycle could widen interest rate differentials between u.s. and japan, which could put downward pressure on yen.

China slowdown can be a downside risk through trade.

USD/JPY picks up bids

Following the news, USD/JPY remains firmer around a two-week high flashed the previous day, refreshing intraday high to 115.43 as Tokyo opens for Friday.