The Bank of Japan may give up the bond yield curve control

The Bank of Japan may give up the 10-year bond yield curve control as soon as next year. This could happen due to the growing prospect of inflation and wage expectations being exceeded. That's the view shared by Takeo Hoshi, a researcher with close ties to current central bank policymakers.

Nevertheless, in an interview with Reuters on Monday, he said the central bank also needs to prevent the risk of inflation significantly exceeding forecasts. Because when labor shortages intensify, wages rise.

With inflation expectations already quite high, core consumer inflation could exceed the Bank of Japan's target of 2 percent in the next fiscal year, Hoshi said. It would thus provide an opportunity for the central bank to abandon its 0% target for 10-year bond yields.

Hoshi also noted that prices in Japan used to rise modestly, but now things are changing. Japan may be headed for a period of high inflation. The central bank has to start worrying that the rate of inflation could be higher than projected.

According to him, if the Bank of Japan is going to bring monetary policy back to normal, it will do so in several stages. The first step is to cancel the 10-year target rate because it distorts the shape of the yield curve.

Hosi believes that the central bank will then reduce the size of its balance sheet by slowing or stopping asset purchases. The bank will then move to raise interest rates.