Bank of Japans takeaway from Fed bungle: Keep the message simple

Written by Reuters | Tokyo | Updated: Sep 29 2013, 02:25am hrs
The US Federal Reserve's surprise decision not to start tapering its massive stimulus convinced the Bank of Japan about one thing -- the need to keep market expectations anchored with a simple, clear message.

BOJ policymakers have sprung into action since last week's Fed gathering with the most explicit explanations to date of how the central bank will measure the success of its own policy turning years of deflation into 2% inflation.

In so doing, they have indicated the central bank's economic stimulus could remain in place after two years, the timeframe it gave in April for getting to 2% inflation, and so implying that it is a long way from even considering its own exit strategy.

They want to avoid the sort of market volatility triggered by the Fed, which for months had flagged it could rein in its economic stimulus before the end of the year, prompting markets to expect an announcement at last week's meeting. Fed chairman Ben Bernanke had suggested the stimulus could stop by the middle of 2014.

People familiar with BOJ thinking say the central bank wants to pre-empt questions about its policy following the Fed's meeting. They think the Fed had been too specific in identifying the conditions that would trigger a tapering of its stimulus and in the end that made it difficult to avoid causing a market upset.

"Offering a lot of guidance doesn't necessarily heighten transparency on monetary policy," said one of the officials familiar with the BOJ's thinking.

The officials declined to be identified because they are not authorised to speak publicly.

Japan is years away from engineering an exit from its own huge stimulus. But since it is following similar policies to the Fed it had more than a passing interest in the US central bank's meeting. The Fed injects $85 billion into its economy each month, while the BOJ injects about 7 trillion yen ($71 billion) policies known as quantitative easing.

The Fed's decision to delay the start of tapering surprised not only markets but many BOJ officials. The Fed's forward guidance had heightened, rather than diminished, confusion over the course of policy, some said.

In their eyes, the more the Fed offered guidance on the potential timing of policy turns, the less leeway the US central bank left itself to make adjustments later if economic conditions changed. "Don't talk too much about the policy outlook, particularly about the timing of an exit," said a source with direct knowledge of the central bank's thinking. "That may be the takeaway for the BOJ from what happened last week."

The big fear for the BOJ is that markets start to factor in a change in its policy too soon, as they did with the Fed. "The Fed was only trying to scale back stimulus, not tighten policy. Still, markets got ahead of themselves and long-term rates shot up more than expected," BOJ board member Takahide Kiuchi said hours after the Fed's decision.

Although the BOJ launched its massive stimulus campaign in April, it had been largely coy about describing the conditions that would signify it had met its policy goal of 2% inflation, raising questions in markets.

In a speech delivered two days after the Fed decision, BOJ governor Haruhiko Kuroda suggested simply reaching 2% would not be enough. Instead, the inflation level would have to be inbuilt into Japanese expectations. "To use the metaphor of the anchor, the aim is to set the 2% anchor deeply in people's understanding and make the observed inflation rate hover around that anchor," Kuroda said.