OECD: BOJ needs to keep
easing but should monitor risks
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[November 28, 2016]
TOKYO
(Reuters) - The Bank of Japan should maintain monetary easing until
inflation is above its 2 percent target but should be mindful of
financial distortions caused by its policies, the Organisation for
Economic Cooperation and Development (OECD) said on Monday.
The BOJ's new policy framework gives it more flexibility, but it remains
to be seen if will be successful and it could be difficult to target
10-year government bond yields, the OECD said in its semiannual Economic
Outlook Report.
On the whole, the OECD welcomed the BOJ's decision in September to
switch its policy target to interest rates from the pace of money
printing, after years of massive asset purchases failed to jolt the
economy out of stagnation.
But the OECD report highlighted concerns about the financial sector and
the growing limitations on monetary policy.
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"The Bank of Japan should maintain monetary easing, as intended, until
inflation is stable above the 2 percent target, while taking account of
costs and risks in terms of possible financial distortions," the OECD
said in the report.
The BOJ revamped its quantitative easing to make policy more suited to a
long battle to achieve inflation.
It now buys government bonds to keep the 10-year yield around zero and
applies a negative 0.1 percent interest rate on a small portion of
commercial banks' reserves.
The negative interest rate policy, which went into effect in February,
has raised concerns about profitability for commercial banks and
insurance companies, the Paris-based think tank said.
Additional scope for monetary policy is exhausted without strong fiscal
spending and structural reforms in Japan and other advanced economies,
the OECD said.
The report also said targeting the 10-year yield could be "complicated
in practice."
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![](../images/112816pics/busine23.jpg)
A man walks past the Bank of Japan building in Tokyo, Japan November
1, 2016. REUTERS/Kim Kyung-Hoon
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Japan's economy will continue to grow in the next few years partly due
to government stimulus spending, but China's economy remains a risk
given it is Japan's largest export market, the OECD said.
The BOJ has repeatedly pushed back its timeframe for hitting its
ambitious 2 percent inflation target, most recently to "around fiscal
2018", as weak consumption and falling import costs from a strong yen
weigh on price growth.
Japan's core consumer prices marked their eighth straight month of
annual declines in October, illustrating the sheer scale of the central
bank's struggle to beat deflation and stagnant growth with diminishing
policy options.
(Reporting by Stanley White; Editing by Kim Coghill)
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