By Leika Kihara

WASHINGTON (Reuters) – The Bank of Japan may have scope to tweak its bond yield target this year on growing prospects the country will see a durable rise in wages, a senior International Monetary Fund official said on Saturday.

Ranil Salgado, the IMF’s Japan mission chief, said the outcome of this year’s “shunto” annual wage talks between big firms and unions have so far been stronger than expected, a sign the country’s wage dynamics may be changing.

The caveat is whether smaller firms would follow suit in raising wages, and whether companies will keep increasing pay next year and beyond, he added.

“Our view is, unless there is a global shock … even next year’s shunto negotiations should be pretty good,” Salgado told Reuters in an interview on Saturday.

Salgado said the BOJ must keep monetary policy ultra-loose as sustainable achievement of 2% inflation is not yet in sight.

Once the BOJ has confidence that Japan will see inflation and wage growth durably accelerate, it can tweak its long-term interest rate target, he said.

Under its yield curve control (YCC) policy, the BOJ guides short-term interest rates at the -0.1% level and the 10-year bond yield around zero with an implicit cap of 0.5%.

As long as the short-term rates remain zero or slightly negative, the BOJ can keep monetary policy accommodative even if it tweaks the yield target, Salgado said.

“Our personal view is, yes,” he said, when asked whether conditions could fall in place for the BOJ to tweak the 10-year yield target this year. “We are advising (the BOJ) pretty much already to be thinking about it.”

With inflation exceeding the BOJ’s target and the cost of prolonged easing increasing, markets are rife with speculation the BOJ will tweak YCC this year under its new governor, Kazuo Ueda.

Ueda has said the BOJ must maintain ultra-loose policy, including YCC, for now as inflation is likely to fall back below its 2% target as import prices begin to fall.

(Reporting by Leika Kihara; Editing by Paul Simao)

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