If BOJ Falls Behind Curve, Catching Up Could Hurt Economy, Board Member Says
Tokyo – The Bank of Japan (BOJ) needs to seriously consider a shift in its long-standing ultra-loose monetary policy, with board member Naoki Tamura issuing a stark warning: failing to act soon could necessitate more aggressive, economically damaging moves down the line. Tamura's comments suggest a growing internal debate within the central bank about the timing and necessity of resuming rate increases, a move that would mark a significant departure from years of unprecedented easing.
Indeed, Tamura articulated a critical concern that many market watchers have harbored for months: the risk of the BOJ falling behind the curve. If the central bank waits too long to normalize its policy stance, the eventual need to catch up with global peers and rein in sustained inflationary pressures could force a sharper, more disruptive adjustment. Such an aggressive tightening, he suggested, could inflict unnecessary pain on the Japanese economy, impacting everything from corporate borrowing costs to household consumption.
For years, the BOJ has been an outlier among major global central banks, steadfastly sticking to its yield curve control (YCC) framework and negative interest rates even as the U.S. Federal Reserve, the European Central Bank, and others embarked on aggressive rate-hiking cycles to combat soaring inflation. The rationale has largely been that Japan's inflation, while rising, was not yet "sustainable and stable" enough, particularly without robust wage growth. However, recent data, coupled with a weakening yen and persistent imported inflation, are increasingly challenging that narrative.
Tamura's remarks underscore a pragmatic view: the BOJ shouldn't wait until it's absolutely certain that its 2% inflation target is met sustainably before adjusting policy. Instead, he argues, a proactive approach is necessary to prevent a scenario where the central bank is forced into a corner. Imagine a sudden, sharp hike in interest rates after years of near-zero borrowing costs – it could trigger significant volatility in bond markets, tighten financial conditions abruptly for businesses already grappling with global uncertainties, and potentially dampen the very economic recovery the BOJ has worked so hard to foster.
The challenge for the BOJ is immense. Unwinding a decade of extraordinary monetary easing, including massive asset purchases and the complex YCC program, is a delicate operation. Any perceived misstep could send ripples through global financial markets, given Japan's status as a major global creditor. Moreover, the bank's long-held commitment to stimulus under Governor Haruhiko Kuroda has entrenched expectations of continued easing, making any pivot particularly impactful.
As the global economic landscape continues to evolve, with inflation proving stickier than initially anticipated in many regions, the pressure on the BOJ to reconsider its unique policy stance will only intensify. Tamura's intervention serves as a powerful reminder that the path ahead for Japanese monetary policy is fraught with difficult choices, and the cost of inaction could, ironically, be a more painful economic future.
