BOJ members saw need to tweak yield cap amid inflation risks

Bank of Japan board members saw the need to make its yield cap program more flexible to prepare for the risk of elevated inflation and long-term government bond yields, with one member saying that its 2 percent inflation target has "clearly come in sight," a summary of opinions showed Monday.

Policy Board members said at its July 27-28 meeting that tweaking the central bank's yield curve control program, which keeps borrowing costs extremely low, is necessary to ensure that monetary easing can remain in place while addressing its negative side effects.

The summary of opinions also underscored the challenge facing the BOJ in coping with growing uncertainty over the inflation outlook. The central bank expects core consumer prices, a key gauge of inflation, will overshoot 2 percent in fiscal 2023, though they are forecast to slow in the next two years.

"In order to ensure that monetary easing can be continued smoothly for as long as necessary, it is desirable that the bank increase the flexibility of yield curve control to a certain extent in advance while it is able to do so without turmoil," one member said.

"Achievement of 2 percent inflation in a sustainable and stable manner seems to have clearly come in sight," another said. "In order to continue with monetary easing smoothly until an exit, the bank should allow greater flexibility in its conduct of yield curve control."

At the meeting, the BOJ renewed its pledge to persist with monetary easing. But it decided to allow 10-year Japanese government bond yields to rise above 0.5 percent, with a pledge to keep them below 1 percent by conducting fixed-rate bond buying.

Since then, the yield has broken above that 0.5 percent threshold, prompting the central bank to carry out additional bond purchases to slow the increase.

BOJ Governor Kazuo Ueda has dismissed the view that the recent tweaking of the yield curve control program is a prelude to monetary policy normalization. The central bank sets short-term interest rates at minus 0.1 percent while guiding long-term ones to around zero percent.

One member said there is a "significantly long way" to go before the BOJ revises its negative interest rate policy, as the 2 percent inflation target is still far off, adding that the current yield curve control framework should be maintained.

On the prospect of achieving stable inflation, several board members pointed to positive changes, with Japan's recent inflation mainly a result of surging import costs of fuel, raw materials and other items.

The BOJ has stressed the need for sustainable wage growth that can support domestic demand so its inflation target can be attained stably. Some members said more time is needed to see the strength of wage growth.

Following sharp wage hikes during this year's annual "shunto" negotiations between labor unions and management, one member said more firms have started to consider similar rises for the next fiscal year and beyond.

"There is likely to be a new phase where wages and services prices continue to increase," the member said.

Another member said pay and prices could continue rising "at a pace that has not been seen in the past," given that companies are breaking with their practices that have been in place for nearly three decades.

The summary of opinions was compiled by Ueda and comments were not attributed to individual members.

© Kyodo News