TOKYO- The International Monetary Fund (IMF) said Japan’s commitment to allow the yen to move flexibly will help the central bank focus on achieving price stability, warning against growing calls by some analysts to use monetary policy to slow the currency’s decline.
The IMF’s executive board also said further hikes in the Bank of Japan’s (BOJ) short-term policy rate should “proceed at a gradual pace and be data-dependent,” given balanced risks to inflation and mixed signals in recent data.
The board “underscored that Japan’s longstanding commitment to a flexible exchange rate regime will help absorb shocks and support monetary policy’s focus on price stability,” the IMF said in a statement released by its executive board in Washington on Monday.
By purchasing government bonds flexibly in accordance to market developments, the BOJ can “mitigate excessive shifts in yields” that could hurt Japan’s financial system during its historical transition from ultra-loose monetary policy, the IMF said.
The recommendations come as Japan struggles to combat persistent yen falls that have become a headache for policymakers, as the weaker currency hurts consumption and the broader economy by inflating the cost of raw material imports.
Japan’s Ministry of Finance is suspected to have intervened in the currency market at the end of April through early May to slow the yen’s declines, which accelerated in part due to market expectations the BOJ will be in no rush to raise interest rates after pulling them out of negative territory in March.
In Japan, the Ministry of Finance has the authority to decide whether and when to intervene. The BOJ acts as an agent and executes the orders on behalf of the ministry.
Meanwhile, the BOJ may decide to reduce the size of scheduled bond buying next month to resuscitate a bond market left largely dysfunctional by its continued huge purchases, former central bank executive Kazuo Momma told Reuters.
But the BOJ is likely to wait at least until September in raising interest rates to scrutinize whether wages, consumption and service-sector prices rise enough to keep inflation durably around its 2 percent target, Momma said in an interview on Tuesday.
“Compared with ending negative rates, hiking short-term rates to 0.25 percent would have a bigger impact on the general public by pushing up mortgage loan rates and smaller firms’ borrowing costs,” he said.
“The BOJ needs to convince the public that raising rates is necessary,” which means it must wait for consumption to emerge from the doldrums, said Momma, who retains close contact with incumbent policymakers.
