IMF Warns of Inflation Risk in Japan... Urges Preparedness for Monetary Tightening

IMF Chief Economist
"Prepare for the Need to Start Monetary Tightening"
Focus on the Financial Policy Decision Meeting on the 27th-28th

The International Monetary Fund (IMF) advised the Bank of Japan (BOJ) on the 25th (local time) to move away from its Yield Curve Control (YCC) policy and prepare for monetary tightening.

[Image source=Reuters Yonhap News]

Pierre-Olivier Gourinchas, IMF Chief Economist, told reporters in Washington on the same day, "There is a risk that inflation in Japan will rise." He explained, "Our advice to Japanese financial authorities is that while monetary policy can remain accommodative for now, they need to prepare for the necessity of starting tightening," adding, "Our recommendation is that (Japan) become more flexible and move away from the YCC policy."

The IMF's recommendation came ahead of the BOJ's Monetary Policy Meeting scheduled for the 27th-28th. The BOJ has stated that it will maintain accommodative monetary policy until it achieves a continuous and stable inflation rate of 2%. This was a policy to continue monetary easing to escape Japan's chronic issues of low growth and low inflation.

Regarding this, the market believes that the BOJ may have underestimated inflation. Japan's Consumer Price Index (CPI) for June rose 3.3% compared to a year earlier, surpassing the previous month's increase of 3.2%. It is analyzed that Japan is in trouble due to high inflation. Nicholas Smith, a strategist at CLSA, pointed out, "The BOJ has also observed how the U.S. Federal Reserve (Fed) was criticized for calling inflation temporary and missing the timing to control prices."

As inflationary pressures increase, there is also anticipation that the BOJ may revise its YCC policy. The core of the BOJ's ultra-loose policy, YCC, is a policy that limits the fluctuation range of Japan's long-term 10-year government bond yields to ±0.5%. U.S. investment banks Goldman Sachs and JP Morgan have forecasted this week that the BOJ may revise its YCC policy.

Strategist Smith said, "The BOJ's inflation forecast was wrong," and predicted, "If the BOJ does nothing, there is a risk that the yen-dollar exchange rate will soar to 150 yen. There is a strong possibility that the YCC policy will be revised."