By Kantaro Komiya
TOKYO (Reuters) – The Bank of Japan (BOJ) could unwind its ultra-loose monetary policy between March and October next year, according to almost half the economists in a Reuters poll on Monday, much sooner than predicted in previous projections.
The shift in expectations comes amid growing debate about whether one of the world’s most dovish central banks can sustain its extremely low interest rates as the economy grapples with a tanking yen and surging imports costs.
Of 26 economists polled, 11 expect the central bank will unwind its ultra-loose policy between March and October, the Dec. 8-15 poll found. Half, or 13, said the BOJ wouldn’t scale back until 2024 or later and two still expect the next move to be more easing of policy.
The poll also found analysts’ top suggestion for funding the historic Japanese defence build-up was through tax hikes, backing a ruling party proposal to finance defence budgets by tax hikes for companies, personal income and tobacco.
Military reinforcement and the possibility of monetary normalisation are two of the biggest policy challenges for the world’s third-largest economy, amid growing security risks and 40-year-high inflation.
The most common means tipped by analysts for the BOJ to unwind stimulus would be a tweak to its forward guidance, according to 15 respondents. Widening the long-term yield cap range from 0.25% was chosen by nine while seven opted for raising the 10-year yield target from 0%.
A separate question showed 22 of 25 economists see a smaller than 25% chance the BOJ modifies its yield-curve control (YCC) scheme or commits to a review of its policy framework before governor Haruhiko Kuroda’s term ends in April.
Such a change should wait until spring wage negotiations, said Mari Iwashita, chief market economist at Daiwa Securities. Kuroda has repeatedly said substantial pay increases next spring are key to achieving the BOJ’s goal of sustainable 2% price inflation.
Two respondents, at Credit Suisse and Fukoku Mutual Life Insurance, said the likelihood of change before Kuroda leaves is between 25% and 50%, while a JP Morgan economist saw it as high as a 50-75% chance.
“The BOJ would never pre-announce YCC’s tweak because that may cause a liquidity problem in the bond market, as it did in Australia,” said Ayako Fujita, chief economist at JPMorgan Securities, referring to the Reserve Bank of Australia’s “disorderly” exit of its yield target in 2021.
She added a blitz revision to the long-term yield policy, such as an upward shift of its 0.25% cap, could come as early as the next quarter, considering Kuroda’s Nov. 2 remark that stable 2% inflation would lead to a policy tweak.
DEFENCE WITHOUT DEBT
Asked about how Japan’s defence budget spending increase would ideally be funded, nine of 20 economists chose tax hikes.
Six said the government should cut back spending on other budget items, while four said the majority of funds should come from non-tax revenues such as foreign reserve surplus or annual budget left-over. No one selected “mostly by new debt issuance”.
Analysts were divided over which taxes should be raised for the military build-up.
In a question allowing multiple answers, 14 of 20 respondents chose corporate taxes, 10 chose tobacco taxes, and income and capital gains taxes received eight votes each. Six selected sales taxes.
Elsewhere in the poll, Japan’s annualised growth projection was upgraded to 3.3% for the current quarter but downgraded to 0.8% for January-March, according to a median estimate of 30 economists.
Analysts slightly raised Japan’s inflation forecasts for each quarter up to April-June 2023, with core consumer prices now expected to increase 2.8% in the current fiscal year and 1.8% in fiscal 2023, respectively.
(For other stories from the Reuters global economic poll:)
(Reporting by Kantaro Komiya; Polling by Anant Chandak; Editing by Sam Holmes)