The Bank of Japan should gradually raise short-term interest rates and make its bond yield control policy more flexible, if inflation stays around its 2% target and is accompanied by sustained wage growth, the OECD said on Thursday.

While the BOJ made tweaks to yield curve control (YCC) last year to loosen its tight grip on long-term interest rates, markets could challenge the policy again if inflation remains above its 2% target and global yields go up, it said.

The central bank should thus continue efforts to make YCC more flexible, such as by raising the 10-year bond yield target or moving to a short-term yield target, the OECD said.