Bank of Japan’s 2% inflation target could be adjusted to a “range”

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The Bank of Japan’s (BOJ) 2% inflation target can be modified to make it a “range” or range in order to maintain monetary policy flexibility amid possibly higher inflation compared to pre-COVID times, Sayuri Shirai, a former member of the bank’s governing council, said on Wednesday.

Shirai, widely seen as a candidate to become deputy central bank governor this spring, also said there should be a review of Japan’s monetary policy over the past 10 years.

“Inflation of 2% has been achieved, although it could have been due to supply-related (factors), and the structure of inflation could have changed in the long term due to the coronavirus, geopolitical risks and demographic aging,” Shirai said.

“Given the possibility that inflation will remain high compared to before the pandemic, we need to be careful about abolishing the 2% inflation target and I think turning it into a range is an option.”

The Bank of Japan, long concerned with reviving price growth to avoid the risk of deflation, has been an outlier among central banks this year.

It has kept interest rates negative while other central banks have risen sharply to control inflation, but last month it unexpectedly tightened its policy band for bond yields, and some speculators are raising bets on bigger changes.

The Bank of Japan’s new direction, once current Governor Haruhiko Kuroda’s term ends in April, should carry out a monetary policy review, Shirai said, as he had the impression that the central bank’s communication with markets had become slightly “complex.”

“But I don’t see a drastic change in the (BOJ) policy framework, as Japanese economic fundamentals seem to support low interest rates,” he said.

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