Gita Gopinath, First Deputy Managing Director of the International Monetary Fund, said on Friday that the Bank of Japan can avoid upsetting global markets with its policy move by raising interest rates gradually and communicating clearly throughout the process.
Japan’s output gap will remain closed throughout next year, and this year’s annual wage talks will result in faster wage growth than last year, allowing the central bank to stop its yield curve control (YCC) and large asset-buying program, she stated.
Ending its negative interest rate policy, which has been in place since 2016, is expected to be a seamless process because investors understand that inflation-adjusted real borrowing rates will stay very low, according to Gopinath.
However, she stated that any future increases in the short-term policy rate should be moderate and spread out over several years.
“Regardless of whether you do the first increase in two months or three months, the main point is to raise (rates) slowly, over a few years,” she said in a telephone interview with Reuters.
“As long as the BOJ moves gradually, which is what they have signalled that they will do, and provides the right communication to go along with it, that should not have very large spillovers to the rest of the world,” she went on to say.
As part of its efforts to reflate GDP and attain its 2% inflation objective, the BOJ maintains short-term interest rates at -0.1%, restricts long-term bond yields around zero under YCC, and purchases massive amounts of assets to inject money into the economy.
However, with inflation exceeding 2% for well over a year, the BOJ has been laying the framework for the exit of its complex stimulus programme, with a Reuters poll predicting April as the most likely timetable for terminating negative rates.
Gopinath also emphasised the importance of keeping Japan’s financial system stable when leaving easy policies, such as ensuring that minimum liquidity requirements are available not only to large banks but also to smaller banks.
She stated that there was uncertainty about the level at which Japan’s interest rate would be considered neutral, while some IMF estimates showed the nominal rate would be between 1-2% if it were neutral.
Given the uncertainty surrounding the economic outlook, the number and speed of short-term rate hikes should be data-driven, she stated.
“The point of moving gradually is to gain confidence in the incoming data, and to avoid moving prematurely and triggering downside risks,” she explained.
