The Bank of Japan (BOJ) must make its monetary policy framework more flexible and stand ready to raise its long-term interest rate target next year if the economy can withstand overseas risks, former deputy governor Hirohide Yamaguchi told Reuters.
Yamaguchi, who is considered a candidate to become next BOJ governor, said Japan is already seeing signs of "home-made" inflation, in which broadening price hikes heighten public perceptions that inflation will keep rising longer-term.
"There's a chance core consumer inflation may stay around 3-4% for a fairly long period," Yamaguchi said. "Once inflation expectations become entrenched, it's very hard for central banks to control them. That's a risk the BOJ should be mindful of."- a controversial policy combining a negative short-term rate target with a 0% cap on the 10-year bond yield - when Governor Haruhiko Kuroda's term ends in April.
"When prices start rising, it's very hard to maintain yield curve control" as long-term rates face upward pressure, he said. "The BOJ will find it too risky to abandon YCC in a single blow. If so, the natural answer would be to adjust YCC in small steps," Yamaguchi said. "One idea could be to raise the 10-year yield target and set an allowance band around it."
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