IMF urges BOJ to move away from yield control, prepare for future tightening

investing.com:

By Leika Kihara and Andrea Shalal

TOKYO/WASHINGTON (Reuters) -The Bank of Japan should start preparing for future monetary tightening by moving away from its yield control policy, the International Monetary Fund's chief economist Pierre-Olivier Gourinchas said on Tuesday.

The remarks came ahead of the BOJ's closely-watched meeting on Friday, where the board will release fresh price forecasts and debate whether to tweak its controversial yield curve control (YCC) policy as inflation stays above its 2% target.

«Right now, the risk is probably on the upside, that maybe inflation pressures will continue to remain above the target,» Gourinchas said on Japan's inflation outlook.

«Our advice for Japanese authorities there is that right now, monetary policy can remain accommodative, but it needs to prepare itself for the need to maybe start hiking,» Gourinchas told a news conference held after the release of the IMF's updated World Economic Outlook report.

He said the IMF was encouraging Japan to «be a bit more flexible and maybe move away from the yield-curve control that it has now.»

With inflation exceeding its target, markets are rife with speculation the BOJ could soon phase out its massive stimulus starting with a tweak to YCC — a policy that caps the 10-year bond yield around 0% with an implicit ceiling of 0.5%.

Sources have told Reuters the BOJ is leaning towards keeping YCC unchanged this week, though there is no consensus within the bank on how soon it should start phasing out stimulus.

While a hike in short-term rates remains distant, a decision on whether to make tweaks to the yield band would depend on the balance between the benefits and cost of YCC, the sources said.

Japan's business-to-business service inflation