The International Monetary Fund said that Bank of Japan policymakers should consider ending its yield curve control and massive asset purchases now, and then begin a gradual cycle of monetary policy tightening.
"As Japan's economy continues to recover, domestic demand is displacing rising costs as the main driver of inflation, while the output gap is narrowing and labor shortages are increasing. In the short term, the focus should shift to tightening fiscal policy and curtailing unconventional monetary policy, while maintaining financial stability," the IMF said.
With inflation exceeding 2% for more than a year, the Bank of Japan is preparing to complete a complex stimulus program. According to official data, CPI growth slowed to 2.6% per annum in December (the lowest value since June 2022) from 2.8% per annum in November. Meanwhile, the core inflation rate was down to 2.3%, the lowest in 18 months, from 2.5% in November, but stayed outside the Bank of Japan's 2% target for the 21st month. Monthly, consumer prices edged up 0.1% in December, after being flat in November.
"Ending the negative interest rate policy is likely to go smoothly, as investors are clearly aware that real borrowing costs adjusted for inflation will remain very low. But further increases in the short-term interest rate should be gradual and implemented over several years," said IMF First Deputy Managing Director Gita Gopinath, adding that March data on wage dynamics will be one of the important indicators determining the timing of the end of negative rates. The next meeting of the Bank of Japan will be held on March 18-19.