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What Central Bankers Can Learn From Volatile Markets

Friday, 24 May 2013 | 3:35 AM ET
Federal Reserve Board Chairman Ben Bernanke
Getty Images
Federal Reserve Board Chairman Ben Bernanke

If there's one thing the world's central bankers can take away from this week's market volatility, it is that they need to do a better job of communicating, say market watchers.

The latest comments from the U.S. Federal Reserve about tapering its stimulus program and uncertainty about the implications of the Bank of Japan's radical monetary policy have sent markets on a roller-coaster ride over the past three days.

"In both the U.S. and Japan, the message has been mixed to investors," Steve Goldman, managing director at Kapstream Capital told CNBC Asia's "Squawk Box" on Friday.

"Investors need more information on what quantitative easing measures are and so the message you send [as a central banker] is very important and I'm not sure that policymakers in Japan or the U.S. have got that right yet," he added.

Federal Reserve Chairman Ben Bernanke sounded a dovish tone when he testified to Congress on Wednesday, saying that the premature unwinding of monetary stimulus carries a "substantial risk" of slowing the economic recovery. But in a question and answer session, he also said the Fed could start paring back purchases in a couple of months.

(Read More: Two Storms Brewing: One Political, the Other Economic)

It was the last comment that investors latched upon, sending stocks, bonds and most commodities lower in the U.S. on Wednesday in a sell-off that rippled through global markets Thursday.

"What we're left with is a market that was a little more confused than it was before because what we have now is Bernanke saying that potentially, three to four months of data could see QE [quantitative easing] tapered off," said Chris Weston, chief markets strategist at trading firm IG.

In an interview with CNBC on Friday, Fed policymaker James Bullard defended the Fed chief.

"He is trying to summarize what the committee thinks and I think he did a great job with that," Federal Reserve's Bullard told CNBC, referring to Bernanke's testimony to Congress.

(Read More: It's a Big Moment for Japan: Fed's Bullard)

Instability in the JGB Market
Evan Lucas, Market Strategist at IG says if JGBs fall further, questions will be asked about asset quality and could see downgrades to banks.

What's Going On?

In Japan, the bond market has been marked by instability since the Bank of Japan (BOJ) unveiled a radical monetary policy in early April, with traders trying to assess the implications of the central bank's massive bond-buying plan for the market.

As benchmark 10-year Japanese government bond (JGBs) yields spiked to 1 percent on Thursday, traders hoped the policymakers would offer some clarification about their policies.

On Friday, BOJ Governor Haruhiko Kuroda expressed confidence in the central bank's ability to stem bond-market volatility by conducting market operations flexibly and pursuing a policy that would help revive Japan's economy.

JGB yields had pulled back to around 0.84 percent after those comments.

(Read More: Chopping Bond Markets Put Japan Banks on Edge)

Still, the fact that yields have risen sharply in recent weeks, means the BOJ needs to do more to clear up the uncertainty, analysts said.

"You need a lot more communication from central banks when bond yields rise because yields are always going to rise with the announcement of QE because people are going to sell," said Goldman at Kapstream.

Tai Hui, chief Asia-Pacific strategist at JP Morgan Funds, agreed, saying: "Having a long-term game-plan after successfully launching QE BOJ style is absolutely critical."

- By CNBC.Com's Dhara Ranasinghe, Follow her on Twitter: @DharaCNBC

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