TOKYO The Bank of Japan may have to allow 10-year yields to rise to anywhere from 0.5 percent to 1 percent next year if inflation starts to pick up, former central bank policymaker Sayuri Shirai said on Friday.
The BOJ currently buys government debt to keep the 10-year yield near zero, but this policy is not economically reasonable because this level discourages lending, Shirai said at a Breakingviews seminar hosted by Reuters.
The BOJ will also have to taper its debt purchases at some point because the amount it holds is too large, although it could temporarily take short-term rates more deeply negative to contain a rise in long-term yields, she said.
"If inflation takes off in the first half of next year, the BOJ would have to raise its 10-year yield target," said Shirai, who is currently a professor at Keio University.
"They could adopt a range from 0.5 percent to 1 percent. It is not economically reasonable to have the 10-year yield at zero."
Shirai's five-year term on the BOJ policy board ended in March. Once a vocal advocate of BOJ Governor Haruhiko Kuroda's radical monetary experiment, Shirai has recently warned of the stimulus programme's rising costs.
The BOJ revamped its quantitative easing in September to make policy more suited to a long battle to achieve inflation.
It now buys government bonds to keep the 10-year yield around zero and applies a 0.1 percent charge on a small portion of commercial bank reserves deposited at the BOJ.
The BOJ has also said it will continue to buy government debt so its holdings increase at an annual pace of 80 trillion yen. Shirai said on Friday that this pace was not sustainable and the BOJ would eventually have to taper its purchases.
After three years of aggressive monetary easing has failed to spur inflation, some economists are starting to question how the BOJ will scale back its policies and whether the government will implement enough structural reform to raise Japan's economic potential.
(Reporting by Stanley White; Editing by Eric Meijer)