Hyped up market expectations of more forceful steps by Japan's central bank to beat deflation since its two-punch monetary easing have raised concerns it needs to temper the message, or risk leading investors up a blind alley.
The Bank of Japan eased monetary policy in February and set a 1 percent inflation target to show its determination to fix deflation that has plagued the country for more than a decade.
The aggressive steps, from out of the blue on Valentine's Day, succeeded in altering market perception of what the authorities would do and how they would do it.
But now, alarmed by what it sees as overblown expectations of frequent easing and worried about demands for more quantitative steps, the BOJ is carefully trying to tell markets that the large-scale stimulus measures in February and April were exceptional and won't be easily repeated.
The BOJ wants to signal a pause after easing monetary policy twice in just over two months, but without dispelling expectations it will act if the economy slips.
That is a tough balancing act with potential pitfalls and a big challenge for a central bank rarely praised for its skills in communicating with markets.
"The February easing created a misperception that monetary policy can solve everything. That needed to change," said a source familiar with the central bank's thinking. "A period of easing sporadically to beat deflation may be coming to an end."
Another source expressed a similar view. Both spoke on condition of anonymity due to the sensitivity of the matter.
With interest rates virtually at zero and markets awash with cash, the BOJ knows further easing may not have much direct impact on the economy. But it hopes its actions will lift sentiment, prompting companies and households to spend more.
The BOJ thus won't rule out another easing but wants to keep its finger firmly on the trigger, unless a Greek exit from the euro zone jolts financial markets or there is clear evidence that Japan's recovery is being derailed.
That is a different approach from the February and April actions, delivered despite growing economic momentum and justified as aimed at speeding up an exit from deflation.
In a sign of discomfort over the hyped-up expectations, minutes of the April meeting showed board members complaining about "misunderstanding" in markets that the central bank will ease automatically until 1 percent inflation was in sight regardless of what the economy was doing.
The BOJ presented itself as a bold deflation fighter by setting the inflation target and topping up its asset-buying programmer by 10 trillion yen ($126 billion), double the usual increment. It followed up with another increase of the same scale in April, bringing the target for asset purchases to 40 trillion yen.
Running out of ammunition, the BOJ now wants to pause.
But central bankers are apparently not quite sure how best to do this without disappointing markets and politicians growing impatient with the slow progress in ending deflation.
They got a taste of how tough it is to massage expectations when they removed from a policy statement last week a vow of pursuing "powerful" easing, in place since August 2010.
The move was meant to scale back expectations of frequent easing. It did just that, but a resulting yen rise led Governor Masaaki Shirakawa to stress that there was no change to the bank's powerful easing stance.
Mari Iwashita, chief market economist at SMBC Nikko Securities in Tokyo, questioned why the phrase was removed from the statement if Shirakawa had to revive it shortly after.
"The statement is an important tool for communication," she said. "This episode left some lessons for the BOJ on how it wants to communicate with the market."
TALK AND FORCE-FEEDING
The BOJ is walking a tightrope.
It needs to buy 20 trillion yen more of government bonds by June next year. But some of its bond-buying actions failed to draw enough bids this month as it struggles to force-feed funds to markets awash with cash, a sign it may not be able to top up the asset-buying programmer as frequently as before.
The central bank also worries that boosting bond buying too much without a clear government roadmap to get Japan's fiscal house in order may cause a jump in yields, a risk that led Fitch Ratings to cut the country's sovereign debt rating.
Shirakawa has thus stressed more than before that the BOJ is already buying huge amounts of bonds and with borrowing costs close to zero, there is little point in simply pumping money into markets. He has also warned that monetary stimulus cannot cure ills and only buys time for long-term structural reforms.
But the message has fallen on deaf ears to politicians who want bolder monetary support for the economy, particularly with Japan's huge debt pile leaving little room for fiscal stimulus.
Some lawmakers have called for extreme steps such as revising a law guaranteeing the BOJ's independence so that the government can tinker with monetary policy.
The government has dismissed such calls but wants the BOJ's support in shielding the export-reliant economy from the pain of any sharp yen rises as it tries to push through a sales tax increase to solve Japan's tattered finances.
That means a spike in the yen or jawboning by politicians will remain the key for any further easing, regardless of what line the BOJ wants to sell to markets, analysts say.
Atsushi Mizuno, a former BOJ board member and an executive at Credit Suisse, said the central bank may be saying too much, not too little, and confusing markets on what exactly it wants to achieve.
"Markets don't have time to read between the lines for subtle messages from the BOJ," he told Reuters this month.
"What markets want to hear is not what Shirakawa thinks is right but the BOJ's strong determination to beat deflation."
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