Sources say that Japan plans to revise its anti-deflation policy

By Tetsushi Kajimoto and Leica Kihara

TOKYO (Reuters) – Japan could revisit its decade-long fight against deflation next year, sources told Reuters, as financial markets braced for a weak yen and rising consumer prices that will force Japan’s central bank to finally abandon its ultra-loose monetary policy.

The change could come after the appointment of a new Bank of Japan (BoJ) governor in April, sources said, which would ease policy adjustments imposed by the bank’s current governor, Haruhiko Kuroda.

Under pressure from then-prime minister Shinzo Abe, who wanted to take bolder measures to fight deflation, the BoJ signed a joint statement with the Japanese government in 2013, pledging to achieve the 2% inflation target “as soon as possible”.

This commitment underpinned the intense monetary stimulus implemented by Haruhiko Kuroda and led to the maintenance of very low interest rates in Japan, unlike other major central banks that abandoned their accommodative policies to fight persistent inflation in more restrictive ways. strategy.

Some officials in Prime Minister Fumio Kishida’s cabinet want to revise the 2013 declaration, believing that the goal of fighting deflation is no longer compatible with current economic developments characterized by rising prices.

“There will probably be a new statement as we have a new governor at the BoJ,” said one. “However, it has not yet been decided what form it will take,” he added. Another source close to the Japanese government shared this view.

Kyodo news agency reported on Saturday that the Japanese government is ready to change the BoJ’s inflation target to a more flexible one, with some slack on the 2013 statement.

In markets, the Japanese currency rose 0.5% to 135.76 yen against the dollar on Monday, and bond yields rose as the Nikkei stock index fell to a six-week low, as investors said the news raised the prospect of an unwinding of stimulus measures. .

Asked about Kyodo’s information, the Japanese prime minister’s chief cabinet secretary, Hirokazu Matsuno, told reporters on Monday that there was no reason for the government to revise the 2013 statement.


The revision of the declaration would be the final nail in the coffin of former Japanese Prime Minister Shinzo Abe, who was gunned down at the age of 67 at an election rally last July.

Shinzo Abe’s Abenomics, a three-pronged economic program including massive monetary easing, fiscal spending and structural reforms designed to lift Japan out of deflation, can only be implemented with the support of current BoJ governor Haruhiko Kuroda.

Analysts say an easing of the BoJ’s 2% inflation target could act as a trigger for Haruhiko Kuroda’s phasing out of the stimulus package.

“Under the new, slightly modified joint statement, the BOJ’s 2% inflation target may become a long-term target rather than a target to be reached as soon as possible,” said Toru Suehiro, an economist at Daiwa Securities. “The aim of this review could be to phase out Abenomics,” he said.

Former BoJ deputy governor Hirohide Yamaguchi, who is seen as a candidate to replace Haruhiko Kuroda, told Reuters that the central bank should be prepared to raise interest rates if the economy can survive.. threats from abroad.

“There is a chance that core consumer inflation will remain around 3-4% for quite some time,” he said. “Once inflation expectations take root, it is very difficult for central banks to control them. This is a risk the BoJ should be aware of,” he added.

As inflation in Japan exceeded the BoJ’s 2% target for the seventh month in a row in October, Haruhiko Kuroda said the central bank’s dovish policy was needed until wages rose further.

The BoJ, which begins its two-day monetary policy meeting on Monday, is expected to leave interest rates unchanged.

However, markets believe it could change the yield curve control (YCC) – a controversial policy that combines a negative short-term interest rate target and a 0% cap on the 10-year bond yield – at the end of the month. in April for a five-year term.

About half of economists polled by Reuters in December said they expected the BoJ to end its ultra-accommodative policy between March and October 2023.

Sources told Reuters that discussions on how to lift the BoJ’s yield ceiling could pick up next year, provided wages rise and key economic risks remain contained.

(Reporting by Tetsushi Kajimoto, Leika Kihara and Takaya Yamaguchi, Yoshifumi Takemoto, Kentaro Sugiyama and Takahiko Wada; French version edited by Claude Chenjou, Kate Entringer)

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