Japanese central bankers are reluctant to take much credit for the yen's spectacular retreat since last month's one-two punch of monetary easing and inflation targeting, a sign they are worried markets and politicians have gone too far in expecting further steps.
Investors are factoring in another move as early as April, and the risk for the Bank of Japan is that it will face demands to follow up with more landmark policy steps, even as an economic recovery shows signs of gaining momentum. "Sometimes, the biggest fear for a central bank is for its policy to have too much effect on markets," said one source familiar with the central bank's thinking, who spoke on condition of anonymity due to the sensitivity of the matter.
"You may think you have done something good by acting aggressively. But what happens when people keep asking for more? Now the BoJ has put itself under endless pressure for action." Central bankers stress last month's big bang of adopting a 1 percent inflation goal and expanding its asset-buying scheme by 10 trillion yen ($120 billion), double the usual increase, was an exceptional move.
It certainly had an impact, with the yen subsequently falling to 11-month lows against the dollar and stocks surging to eight-month highs. But instead of giving themselves a pat on the back, central bankers worry that they were too successful. Governor Masaaki Shirakawa has said the yen's fall and stock market gains were due to receding worries about Europe's debt crisis and growing positive signs in the US economy, and that the BoJ's easing only accelerated the trend.
"There are times the BoJ needs to act boldly," said another source familiar with the central bank's thinking. "But there are also times it needs to be cautious about doing too much." Now the central bank's challenge is how to manage expectations when its desired 1 percent inflation remains so far off. Since the February move, its comments on the health of the economy have lost their predictive value for many in the market.
That was evident in March. The BoJ has never eased at two meetings in a row under Shirakawa, and nothing in economic data or market conditions suggested it should have done so in March. Yet the expectations lingered because in February the BoJ justified its surprise action with its desire to continue supporting the economy even while it was already recovering and its efforts to end over a decade of deflation.
That led markets to believe it could ease even if economic risks were receding, making its moves harder to predict. "The communication policy the BoJ has built up for years collapsed on February 14," said Izuru Kato, chief economist at Totan Research and a well respected BoJ watcher in Tokyo. Ahead of the March review, some foreign investors sold yen on expectations the BoJ would follow up February's action with more stimulus. Stock prices nudged up when the policy meeting lasted longer than usual.
When the BoJ held steady, as most domestic market players had predicted, the yen ticked up and stocks eased. Some in the bank were relieved to see only muted market reaction after the announcement. Now, despite growing signs of an economic recovery, many market players expect the BoJ to ease again as early as its April 27 meeting, when it issues new long-term forecasts that will likely show a sustained end to deflation remains distant.
That has seen the yield curve steepen, with the bonds at the longer end rising in line with US Treasury yields as shorter-dated bonds are capped by expectations of further easing. Two-year yields have held around 0.1 percent, and now medium-dated debt is being affected as the market speculates the BoJ could extend its asset buying programme to include bonds of up to five years maturity from the current two-year timeframe. The government also appears to expect the BoJ to do more and to do it soon. Finance Minister Jun Azumi said just days before the March meeting that he hoped the central bank supported Japan's recovery with further steps "towards the spring."