BOJ may raise yield cap again by mid-year, says academic Ito

By Leika Kihara and Takaya Yamaguchi

TOKYO (Reuters) - The Bank of Japan (BOJ) may raise a cap set around its 10-year bond yield target to 0.75% or double it to 1.0% by around mid-year if inflation overshoots its expectations, Columbia University academic Takatoshi Ito said on Thursday.

Any such move would not happen at least until April, when the BOJ publishes new quarterly inflation forecasts under a new governor who will succeed Haruhiko Kuroda, he said.

Ito, who is a close associate of Kuroda's, is seen by some analysts as a candidate to join the central bank's leadership in the coming months. Kuroda's term is up in April, while those of his two deputies expire in March.

If the economy improves and inflation remains elevated, the BOJ will likely tighten monetary policy, starting with steps to steepen the yield curve, Ito said.

"In this regard, the BOJ's decision to widen the yield band (in December) was an appropriate first step," Ito told Reuters in an interview.

"Raising the yield cap to 0.75%, or to 1.0%, is certainly a possibility as the next step" toward normalising the BOJ's ultra-loose monetary policy, he said.

Depending on inflation and wage developments, the central bank may also abandon negative rates by raising its short-term interest rate target from -0.1% by the end of this year, Ito said.

"It's very important for wage growth to accelerate at a pace exceeding the inflation rate. Otherwise, demand will cool and Japan will end up with just cost-push inflation," he said.

"Japan is at the brink of whether recent price rises could push up wages and heighten the public's inflation expectations," he added.

Under its yield curve control (YCC) policy, the BOJ sets the target for short-term rates at -0.1% and that for the 10-year yield around 0% to reflate the economy and sustainably achieve its 2% inflation target.

The BOJ stunned markets last month by widening the allowed band to 50 basis points either side of its 0% 10-year yield target from 25 points. As a result, the 10-year yield cap is now set at 0.5%.

"Kuroda argues that the BOJ hasn't started moving toward an exit. But the BOJ has already put its shoes and coat on," ready to proceed towards ending YCC, Ito said.

"Raising interest rates too quickly would cool the economy. That's why it's important to proceed with rate hikes slowly."

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