(Bloomberg Opinion) -- Kazuo Ueda's mission to dismantle the cumbersome legacy of his predecessor is advancing more rapidly than seemed likely when he took the helm of the Bank of Japan six months ago. The progress has come at significant cost, not least the credibility of its communications. Officials stick to the line that policy is only being tweaked, when key parts of the BOJ's entire approach to setting borrowing costs are being removed or watered down to the point where they are greatly diminished.
Laudable steps to make policy a little less loose are being tarnished in significant ways. The BOJ's approach to conveying its intentions has been woeful, bordering on negligent. Policy shifts come across as being too reactive. Markets increasingly look like they are dictating the pace at which the bank allows long-term market interest rates to increase. On Tuesday, Ueda further loosened his grip on 10-year yields, relegating the prior ceiling of 1%, imposed in July, to a “reference point.” The BOJ also retreated from unlimited purchases of government debt. The changes, partially flagged hours earlier in the Nikkei newspaper, follow a climb in yields that approached the 1% threshold without breaching it.
Moving in increments is something central banks generally favor. The desire is to avoid huge market gyrations and backlash from businesses, consumers and politicians is prudent. But the drip-drip-drip that's characterizing Ueda's leadership is an argument in favor of bolder steps. If yield-curve control is to be formally undone, better to do it in one fell swoop. The last few months have just been painful to watch.
Regardless of BOJ's insistence that yield-curve control, or YCC is alive and well, Tuesday may go down as the moment the policy was effectively abandoned. The bank said that it wants long-term rates to be “formed smoothly in financial markets in response to future developments.” That doesn't sound like an abundance of control, certainly relative to the tight limits on bond fluctuations that existed a year, or even months, ago. “Yield-curve control is now de facto over, but it remains to be seen how rapidly the bank will slow its bond purchases,” Marcel Thieliant at Capital Economics wrote in a note.
At risk of being overlooked is the bank's decision to move away from its daily fixed-rate operations, the main tool for capping yields in which the bank offers to purchase an unlimited quantity of bonds. The BOJ said it will use “nimble market operations” and regular JGB purchases going forward. Ueda is now clearly ceding control to the market. So why continue with the policy at all?
That's just one of the communications challenges plaguing the bank. For the second time in three BOJ policy meetings, investors have been rocked by authoritative Nikkei stories published midway through a two-day conclave. Most agencies see merit in massaging expectations in advance, preferably ahead of a blackout period that commences a few days or a week before the gathering, when insiders are discouraged from talking to the media or making public addresses. But this is on a whole other level. In any other Group of Seven economy, to have it happen once would be rare. For it to occur repeatedly just looks sloppy — or worse.
Who runs the BOJ, the editor-in-chief of that august publication or Ueda? This is more than a communications snafu, though Ueda has had his share of those. It looks like a security breach. If this was the Federal Reserve, a probe into the information's release, possibly conducted by the Office of Inspector General, would be in the cards.
There is little effort to officially communicate ahead of time. Prior adjustments to YCC, when they have occurred, have been called “technical” and “pre-emptive.” The bank is selling itself short. As with July and December, when yields were allowed to rise, this is a substantive change in policy. It's not fiddling around the edges.
Beyond YCC, can there be much doubt that an increase in the benchmark rate is also on the agenda in the next 12 months and quite possibly sooner? The official rate of minus 0.1% has outlived any usefulness it might conceivably have had. (The announcement of negative rates in 2016 is widely regarded as a fiasco that tightened financial conditions and strengthened the yen, rather than the other way around.)
The BOJ's current policy framework is a hodgepodge. Yield-curve control that cedes control of the yield curve to the market. A long-term interest rate of “around zero percent” that encourages the 10-year rate to in fact rise above 1%. A negative rate with so many adjustments it might as well not exist. And forward guidance that continues to suggest the next move will be towards further easing, when every actual step has been in the opposite direction. Is it any wonder the market is so confused, with the yen weakening further in the aftermath of the decision, despite a move that was substantially more hawkish than most would have expected before the Nikkei report?
To convey that a hike to zero isn't tightening or the start of a series of hikes in the manner of the Fed, the European Central Bank or Bank of England will require Ueda and his team to bring their A game. To convey the nuances of not-tight-but-merely-less-loose needs an attentiveness to communications that looks to be beyond them.
Former BOE Governor Mervyn King once said monetary policy should strive to be boring. He made the remark is more benign times, before the pandemic. But by any yardstick, central banking in Japan could use some calming down. That starts with the BOJ taking a hard look at not just what it's doing, but how it's describing it — and who owns the description.
More From Bloomberg Opinion:
- BOJ Yields Some Control, But Also Throws a Curve: Moss & Reidy
- As Goes the Sogo Department Store, So Goes Japan: Gearoid Reidy
- Americans Like Sharing Bad Economic News Too Much: Claudia Sahm
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor for economics at Bloomberg News.
Gearoid Reidy is a Bloomberg Opinion columnist covering Japan and the Koreas. He previously led the breaking news team in North Asia, and was the Tokyo deputy bureau chief.
More stories like this are available on bloomberg.com/opinion
©2023 Bloomberg L.P.
Essential Business Intelligence, Continuous LIVE TV, Sharp Market Insights, Practical Personal Finance Advice and Latest Stories — On NDTV Profit.
