According to Makoto Sakurai, a former policymaker at the Bank of Japan, the central bank of Japan is likely to consistently reduce its large-scale stimulus, and it is possible that it will modify its control over the yield curve as early as October.
Until more information is available on wage growth, the central bank will likely revise its growth and inflation predictions for the current fiscal year in July, as indicated by Sakurai.
He also mentioned that the Bank of Japan is taking a wait-and-see approach because there is a great deal of uncertainty over the future of the international economy.
Sakurai mentioned that it will be in October or December when the final decision is made. If the economy manages to hold, the Bank of Japan may take action, such as allowing for larger swings in yield around the target rate.
On the financial markets, people were making predictions about what the Bank of Japan might do in the future. It is speculated that the current head of the bank, Kazuo Ueda, will eventually stop offering large-scale incentives such as yield curve control policy (YCC), which have been criticized for distorting market prices and eroding the margins of financial institutions.
The Bank of Japan became an outlier in the worldwide trend of central banks tightening their monetary policy as a result of its strategy of maintaining extremely low interest rates. This resulted in an unintended devaluation of the yen as well as an increase in the cost of importing goods.
Central bank member Sakurai, who voted in favor of the YCC policy in 2016, believes Ueda will make gradual but steady progress toward reform.
He pointed out that the Bank of Japan's decision in April to eliminate the commitment to hold interest rates at the "current or lower level" was the first step in the direction of policy normalization.
Having maintained a consistent connection with the Bank of Japan's current policymakers, Sakurai says that the central bank is gradually shifting away from its ultra-loose policy.
He believes that the Bank of Japan's ultimate objective is to abandon the yield ceiling and adopt a policy whose main objective would be setting short-term interest rates.
Soaring bond yields, however, might result in significant losses for financial institutions and a spike in the cost of financing Japan's massive public debt, therefore the Bank of Japan must proceed with caution.
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