TOKYO: The International Monetary Fund urged the Bank of Japan to consider steps to ease the strains caused by its ultra-loose policy on financial institutions, such as targeting a shorter maturity for its long-term bond yield target.

Fiscal policy can complement the BoJ’s efforts to protect the economy from overseas risks, the global lender said, suggesting that Tokyo should not shy away from ramping up fiscal spending in the near-term despite its huge public debt.

“Strengthening the effectiveness of coordination between monetary and fiscal policy remains a high priority,” the IMF said in its Article 4 policy proposal to Japan on Monday.

While the central bank ought to maintain its massive stimulus programme, it must also find ways to mitigate the rising cost of prolonged easing and make its policy sustainable as inflation remains distant from its 2pc target, the IMF said.

“As it stands, both fiscal policy and monetary policy are stretched, leaving limited room to respond to shocks,” IMF Managing Director Kristalina Georgieva told a news conference.

“The BoJ’s accommodative stance needs to continue to support reflation and growth. At the same time, financial sector oversight should be strengthened to mitigate rising financial stability risks,” she said after the Article 4 consultations.

Under a policy dubbed yield curve control (YCC), the BoJ pledges to guide short-term rates at -0.1 per cent and the 10-year bond yield around 0pc.

Published in Dawn, November 26th, 2019