(Bloomberg) -- The Bank of Japan’s words are diverging further from its actions and the erosion of its credibility could end up hurting the central bank, according to Kunio Okina, a former BOJ official.
Okina says he was among BOJ watchers who weren’t convinced by the central bank’s claim last month that the introduction of forward guidance strengthened its commitment to its stimulus program, as it took small steps toward normalizing policy.
“The direction is toward stealth tapering,” Okina, now a visiting professor at Hosei University, said in an interview. “But simply saying that won’t let the policy pass, so they’ve put it in the gift wrap of ‘strengthened easing’ and pushed it out into the world.”
A loss of credibility could make it more difficult for the BOJ to bring about the desired results from its monetary policy, including by inviting misinterpretation by investors.
Okina says it’s unlikely the BOJ will be able to fully restore its credibility unless a sudden burst of growth enables it to achieve its inflation target -- or a crisis gives it cover for a policy reset.
At its policy meeting in late July, the BOJ approved a number of changes many saw as small moves toward normalization: letting bond yields trade a bit higher, halving the amount of reserves the negative rate applies to and conducting equity purchases with more flexibility. Yet it also said its introduction of forward guidance strengthened its commitment to achieving 2 percent inflation.
Okina says the forward guidance -- a pledge to keep rates extremely low for an extended period -- contradicts the BOJ’s message that momentum toward 2 percent inflation is being maintained. Instead, it suggests that sluggish economic growth and lagging inflation will also be around for an extended period, he said.