TOKYO, Dec 19 (Reuters) – The Bank of Japan (BOJ) could ease ultra-loose monetary policy between March and October next year, according to almost half of economists in a Reuters poll on Monday, much earlier than previous forecasts had predicted .
The shift in expectations comes amid a growing debate over whether one of the world’s most dovish central banks can maintain ultra-low interest rates as the economy grapples with a falling yen and rising import costs.
Out of 26 economists polled, 11 expect the central bank to backtrack on ultra-loose policy between March and October, the survey conducted Dec. 8-15 showed. Half or 13 said the BOJ will not scale back until 2024 or later, and two still expect the next step will be policy easing.
The poll also found that analysts’ top proposal for funding Japan’s historic defense buildup was tax increases, and backed a ruling party proposal to fund defense budgets through increases in taxes on businesses, personal income and tobacco.
Military reinforcements and the possibility of monetary normalization are two of the biggest policy challenges facing the world’s third largest economy amid mounting security risks and 40 years of high inflation.
According to 15 respondents, the most common way analysts advise the BOJ to reduce stimulus would be to adjust its forward guidance. Nine opted to increase the long-term yield cap to 0.25%, while seven opted to raise the 10-year yield target to 0%.
A separate question showed that 22 out of 25 economists see less than a 25% chance that the BOJ will change its yield curve control (YCC) system or commit to a review of its policy framework before Governor Haruhiko Kuroda’s term ends in April.
Such a change should wait until wage negotiations in the spring, said Mari Iwashita, chief market economist at Daiwa Securities. Kuroda has repeatedly said that substantial pay rises next spring are key to meeting the BOJ’s goal of sustained price inflation at 2%.
Two respondents from Credit Suisse and Fukoku Mutual Life Insurance said the likelihood of change before Kuroda’s departure is between 25% and 50%, while an economist at JP Morgan put it at a 50-75% likelihood.
“The BOJ would never pre-announce the adjustment of YCC as it could create a liquidity problem in the bond market, as was the case in Australia,” said Ayako Fujita, chief economist at JPMorgan Securities, referring to the “disorderly” exit the Reserve Bank of Australia of its return target in 2021.
It added a flash revision to long-term yield policy, such as an upward move to the 0.25% cap, which could happen as early as next quarter, given Kuroda’s Nov. 2 remark that stable inflation at 2% would prompt a change in policy would lead .
DEBT-FREE DEFENSE
When asked how Japan’s increase in defense spending would ideally be funded, nine out of 20 economists opted for tax hikes.
Six said the government should cut spending on other budget items, while four said the bulk of the funding should come from non-fiscal revenues such as foreign exchange reserve surplus or annual budget balances. No one selected “principally through new debt issues”.
Analysts were divided on what taxes should be levied on the military buildup.
For a multiple-choice question, 14 out of 20 respondents voted for corporate taxes, 10 for tobacco taxes, and income and capital gains taxes received eight votes each. Six selected sales taxes.
Elsewhere in the survey, Japan’s annualized growth forecast for the current quarter was raised to 3.3% but downgraded to 0.8% for January-March, according to a median estimate of 30 economists.
Analysts have slightly raised Japan’s inflation forecasts for each quarter through April-June 2023, with core consumer prices now expected to rise 2.8% in the current fiscal year and 1.8% in fiscal 2023, respectively.
Reporting by Kantaro Komiya; Survey by Anant Chandak; Editing by Sam Holmes
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