WITH few exceptions, the most prominent central banks have retired from the business of providing detailed projections of where interest rates are headed. The costs of being wrong in an era of worrisome inflation were too great. Japan is trying something new: forward misguidance.
Unsettling surprises are a feature of the choices the Bank of Japan (BoJ) has made over the past decade, rather than a bug. Dismantling ultra-loose money and the paraphernalia that has supported it means that communications accidents like the one that rocked global markets recently are bound to happen. If they were, indeed, an accident.
Investors should brace for more adventures on the road to less easy money. With inflation now off the floor — there are arguments about how much momentum prices have — the desired destination is likely an end to vigorous policing of yields on government bonds. And quite possibly, an end to negative official rates. That won’t happen overnight, but the odds of a graceful exit are long. Market sensitivity to tweaks in BoJ policy is extreme because officials are seeking to directly manage the value of securities, rather than guide toward their view.
Few BoJ watchers predicted Governor Kazuo Ueda would let long-term market rates increase at the conclusion of the July 27-28 meeting. Ueda had used a dovish tone earlier in July, affirming at the meeting of the Group of 20 finance ministers and central bankers in India that things were set to stay the same. “Unless the premise is shifted, the whole story will remain unchanged,” he said. Reports from inside the bank seemed to back this narrative; more than 80% of economists expected no policy change, even a tweak.
That was until 2 a.m., Tokyo time, on the morning of July 28, when a story in the Nikkei newspaper hinted that rates on 10-year Japanese government debt would be allowed to go over 0.5%. It was the second time in Ueda’s short reign that Japanese media appeared to be in possession of information from inside the gathering.
Even then, traders didn’t have the full story, with the report carrying no mention of the 1% ceiling. When the official announcement hit after an interminable wait — the BoJ still does not give a time in advance for when policy will be announced, leaving dealers fruitlessly refreshing screens — it confused the market with its mention of three different levels for the 10-year yield (“around zero,” a 0.5% “range,” and the 1% “ceiling” at which the bank would step in). Investors are still debating what the move means.
The July decision “created too many interpretations, because it was just too complex and everybody understood it in a different way,” former board member Sayuri Shirai said in an interview. “I kind of expected that Ueda-san would be a bit clearer.”
It’s far from the first time the bank has struggled to communicate a change in yield-curve control. In fact, every single time the BoJ has changed the way it implements YCC, it has done so differently, going from an ambiguous range to a defined one, and now back to ambiguity.
In an era when communications are a central bank’s foremost tool, the data-driven Ueda was meant to bring clarity. The shock-and-awe strategy of his predecessor, Haruhiko Kuroda, was deliberately designed to stun the market and show he meant business in a way that Masaaki Shirakawa, who led the bank before him, was widely judged not to have. But observers had tired of it by the end of Kuroda’s long decade in charge. Now, Ueda faces the same credibility deficit.
While misunderstanding around the BoJ’s policy partly reflects ignorance of how the bank works and the differing ways in which Japan’s economy operates, Ueda has deepened distrust of whether the bank says what it means and means what it says. A recent comment illuminates this lack of clarity. “There is no specific level in my mind at this stage,” Deputy Governor Shinichi Uchida said last week, in response to a question about when the BoJ would step into the market for 10-year bonds. But then he offered a telling comment: “I mean, I wouldn’t say it even if there was one.”
The BoJ is likely sincere when it says the 2% price goal is still some way off, even if one member seemingly believes it’s on the horizon. But the head fakes are making it difficult to know what it truly believes.
The need for circumspection, to put it charitably, may just be inherent in the whole YCC project. Krishna Guha, who covers global policy at Evercore ISI, has likened the approach to a shift in exchange-rate regimes. You never talk about it in advance for fear that speculators get too far ahead and, consequently, ruin the necessary element of surprise. There’s something to that analogy. During the 1997-98 Asian Financial Crisis, the modus operandi of governments when faced with questions of devaluation was to deny or obfuscate. Same with Latin America in the following years.
There’s a further comparison: capital controls. In the leadup to Malaysia’s decision in September 1998 to slap restrictions on the flow of money out of the country, ministers would discourage discussion of the shift. Shirai is among those who argue that YCC itself was a fudge in the first place to make up for the deep unpopularity of negative rates, which she voted against in early 2016. The BoJ is still working to extricate itself from that decision.
Japan isn’t about to have a currency or debt crisis; the BoJ itself owns a swathe of the domestic bond market after decades of on-again-off-again quantitative easing. But a communications crisis is something else. It would be a tragedy if the mistrust and skepticism that pervaded the end of his predecessor’s second term come to define Ueda’s tenure just a few months after taking the oath of office.
Such are the thrills and spills of unconventional monetary policy. Easier to get in than out.
BLOOMBERG OPINION