Kuroda, an academic close to Japan, says the BOJ is moving towards normalization of its policy

TOKYO 28 December (Reuters) – The Bank of Japan’s decision in raising its bond-yield ceiling may be the first step toward normalising ultra easy policy, Takatoshi Ito, a Columbia University professor, wrote in a column.

The central bank shocked markets by increasing to 0.50% the implicit cap it set for its 10-year yield target. This was in response to market distortions resulting from its yield curve control (YCC), policy.

Kuroda stated that this was not a prelude for an exit from ultra-loose policies, as recent price increases meant Japan’s inflation adjusted, real interest rate had been falling.

This technical point is correct by Kuroda. Ito stated that the modification to the YCC could still represent the first step towards monetary-policy normalization in the column posted on Project Syndicate’s website.

It was plausible to think that the BOJ’s projection of inflation falling below 2% next year could be incorrect, stated Ito. Some analysts consider Ito a potential candidate for BOJ Governor when Kuroda’s term ends.

Japan’s annual consumer inflation rate was 2.8% in November, even after adjusting for higher food and energy prices. Ito indicated that the rate could rise to 2% next year, even if food and fuel prices fall.

He said that the next year’s annual wage negotiations would likely bring significant wage increases, partly to compensate employees from the increase in inflation. This move would boost households’ purchasing power and cause price rises due to stronger demand.

Ito stated, “That would be an ideal starting condition for the BOJ in order to begin hitting its inflation target more sustainably.” He added that Japan’s decade old ultra-easy monetary policy may be over in the New Year.

Kuroda was close to Ito since they worked together in Japan’s finance ministries from 1999 to 2001. Kuroda lobbying hard for the BOJ adoption of a 2% inflation target to end flation. The BOJ made the decision in 2013 and implemented a huge stimulus program when Kuroda became Governor.

Kuroda’s asset-buying program “bazooka”, however, failed to infuse the market. The BOJ adopted YCC as a long-term effort to reach its price goal.

Kuroda believes that if Japan is to maintain a 2% inflation rate, it must have higher wages. This is despite inflation exceeding 2% over the past few months due to rising raw material costs. (Reporting by Leika Kira; Editing by Bradley Perrett