BOJ wants markets ready for a policy shift - just not so soon
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[December 12, 2023] By
Leika Kihara
TOKYO (Reuters) - Japan's central bank chief faces a key test of his
communication skills at next week's monetary policy meeting, where he is
expected to keep alive prospects of an end to negative rates while
hosing down excitement that such a move is imminent.
Less than a year into the job, Bank of Japan Governor Kazuo Ueda has
already wrong-footed markets twice in comments about the future of
policy, most recently last week when bond yields and the yen surged on
expectations of a near-term shift in rates.
It has been more than 16 years since Japan's last interest rate hike and
financial markets have developed a hypersensitivity to any hint of an
end to ultra-loose monetary settings, making it difficult for the BOJ to
signal changes without triggering destabilizing bond yield spikes.
However, as the economic case for an end to accommodative policy builds,
the BOJ's priority now more than ever is to avoid surprising markets,
three sources familiar with its thinking say. That means Ueda - unlike
his predecessor who shocked markets with abrupt policy shifts - will try
to drop some hints in advance.
"There's nothing good about surprising markets especially when central
banks are weaning out stimulus," one of the sources said, a view echoed
by another source.
That heightens the importance of what Ueda will say at his news
conference after the BOJ's two-day meeting ending on Tuesday, where the
board is seen making no major changes to its ultra-loose policy setting.
More than 80% of economists polled by Reuters in November expect the BOJ
to end its negative rate policy next year with half of them predicting
April as the most likely timing. Some see the chance of a policy shift
in January.
Ueda faces a tricky balancing act. With inflation exceeding its 2%
target for well over a year, the BOJ wants to keep alive market
expectations of a near-term shift.
But the BOJ also needs to avoid any explicit language or hints that
commit it to specific timing, which means keeping some ambiguity in its
messaging.
The BOJ's current strategy is to emphasize the prerequisites for an
exit, but hold off pre-announcing the expected timing, the sources said.
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Japanese national flag is hoisted atop the headquarters of Bank of
Japan in Tokyo, Japan September 20, 2023. REUTERS/Issei Kato/File
Photo
The delicate challenge of communicating without committing means
Ueda could offer an array of ambiguous comments that risk being
misinterpreted and causing unwanted market volatility, some analysts
say.
A more transparent way of communicating would be to tweak or ditch
a dovish forward guidance on policy that promises to ramp up
stimulus as needed, though many in the BOJ rule out the option given
uncertainty over the economic outlook, the sources said.
The BOJ's communication is also constrained by a disconnect between
its dovish policy bias and hawkish forecasts predicting inflation
will stay near its 2% target until early 2026.
Blaming the inflation overshoot on cost-push pressures, Ueda has
stressed the need to wait for inflation to be driven more by
domestic demand and stronger wage growth, in normalizing policy.
But the governor himself acknowledged that this was a tough sell,
telling parliament last week it was "hard to explain all this in a
convincing way."
As well as creating market volatility, messaging missteps also
undermine the effectiveness of central bank communication, an
essential part of the policy transmission process.
Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan
Stanley Securities, plans to focus on how Ueda describes progress
the BOJ has made in scrutinizing the price outlook.
"The key is how much the BOJ will try to signal the chance of a
policy change in January," she said. "In any case, markets will
probably remain volatile given the risk of Ueda's comments being
taken out of context again."
(Reporting by Leika Kihara. Editing by Sam Holmes)
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