OECD has suggested that BoJ should consider implementing a gradual rise in short-term interest rates and introduce more flexibility into its Yield Curve Control policy. This recommendation comes at a time when Japan appears to be at a crucial economic juncture, with inflation trends potentially stabilizing around BOJ’s 2% target, a goal set in 2013 but not consistently achieved since then.
In its report, OECD stated, “Japan is at a turning point, with inflation more likely to settle durably around the 2% inflation target than at any time since its inception.” To adapt to this changing economic landscape, OECD advised that “greater flexibility in the conduct of yield curve control and a gradual modest increase in the short-term policy interest rate are warranted.” This advice is predicated on projections of sustained inflation and evolving wage dynamics in Japan.
However, OECD also issued a cautionary note regarding the uncertainty surrounding Japan’s inflation outlook, which it described as “exceptionally large.” This uncertainty presents a significant challenge for BOJ as it navigates toward its inflation target. OECD emphasized the delicate balance BOJ must maintain, stating, “The key challenge facing the BOJ is how to durably achieve its inflation target without significantly overshooting.”