In our view, it is no longer appropriate for the Bank of Japan to pursue the original goal of Kurodanomics, namely 2% inflation in 2 years. In the first policy statement published under Governor Kuroda in April 2013, the BoJ stated The Bank will achieve the price stability target of 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) at the earliest possible time, with a time horizon of about two years.
The Japanese economy is likely to stall following the consumption tax rate hike from 5% to 8% in April. What could the Bank of Japan do to reflate the economy? In our view, the BoJ can reallocate its JGB purchases toward longer maturity to flatten the yield curve, while maintaining the overall size of its JGB purchase unchanged. In addition, the BoJ should strengthen its forward guidance to anchor the future policy rate expectation that should keep short and medium term interest rates in check. Such combination of Twist operation and Forward guidance should lead to lower interest rates across the curve.