Kazuo Ueda faces the tough task of shifting gears to normalise monetary policy without hurting the economy too much, writes Masahiko Takeda.
While many central banks are grappling with how to fight inflation in the middle of an outbreak of financial instability, the Bank of Japan is facing its own unique quandary.
This argument is misleading, since the virtuous cycle won’t come by not changing monetary policy – quantitative and qualitative easing failed to generate price and wage growth for years. Still, if the yen’s decline remains on pause, as it has since November, cost-push price increases will eventually run their course, halting inflation. So, high inflation of itself does not warrant a reversal of monetary policy.The first is yield curve control.
Yet, there are three serious worries about the higher interest rates that will result from a relaxation or removal ofFirst, how badly will higher interest rates affect the economy? While allowing interest rates to rise is risky under precarious economic conditions, the estimated output gap in Japan, which widened during COVID-19, has now been closed. This might be the time to test the patient’s resilience to a gradual reduction in medication.
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