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OECD: BOJ will need to rethink policy if inflation remains elusive

TOKYO (Reuters) - The Bank of Japan should rethink monetary policy if it can’t meet its inflation target reasonably soon, or it could end up holding too much government debt, the Organisation for Economic Cooperation and Development (OECD) warned on Tuesday.

Bank of Japan Governor Haruhiko Kuroda poses for a picture before his speech at the University of Zurich in Zurich, Switzerland November 13, 2017. REUTERS/Arnd Wiegmann

The BOJ buys government debt to keep 10-year bond yields near zero, and it is likely to own more than half of all government bonds in the market by the end of 2019, the OECD said in its twice-yearly Economic Outlook Report.

Such large holdings could compromise financial stability and financial intermediation, the OECD warned in the report.

Japan’s government debt has surpassed 220 percent of gross domestic product, which poses a serious risk and requires measures to control gains in social welfare spending, the OECD said.

“A rethinking of the monetary policy strategy would, however, be needed if the inflation target is not met for a prolonged time,” the OECD said in the report.

“The BOJ becomes an even more predominant holder and buyer of government bonds and financial intermediation and stability become compromised.”

The OECD stopped short of calling for an immediate change, saying the BOJ should stick with its current policy framework for now.

However, BOJ Governor Haruhiko Kuroda’s program of aggressive government debt purchases is in its fourth year, and some economists worry that quantitative easing has gone too far.

Last year the BOJ introduced negative interest rates by charging 0.1 percent on a portion of commercial bank’s reserves, but banks have complained that this erodes their profits.

The BOJ has postponed the timeframe for its 2 percent inflation target six times since Kuroda launched his huge asset-buying program in 2013, and now expects inflation to reach 2 percent in the fiscal year ending in March 2020.

The OECD expects Japan’s consumer inflation to reach 1.7 percent in 2019.

However, the OECD said it expects Japan’s economic growth to slow from 2018 as the government provides less fiscal stimulus. The OECD also warned that employment gains will peak next year as the working-age population declines.

Reporting by Stanley White; Editing by Eric Meijer