The Bank of Japan is caught in a trap and has lost policy credibility, economist Mohamed El-Erian said Thursday.
"The shocker is whatever they do, they get it wrong. They ended up doing too much last time, and they suffered a currency appreciation, and they did nothing this time, and they got the same outcome," El-Erian told CNBC's "Fast Money: Halftime Report."
The Bank of Japan surprised markets on Thursday by leaving monetary policy unchanged. The Street had expected the central bank to cut interest rates and increase its purchases of ETFs.
Japanese policymakers adopted negative interest rates in January. The move was expected to halt currency appreciation in the world's third-largest economy, which would support domestic exporters and encourage wage growth. But the dollar has fallen nearly 10 percent against the yen this year.
The BOJ now straddles the line that separates effective policy and counterproductive measures, said El-Erian, Allianz's chief economic advisor. Next to cross that line will likely be the European Central Bank, followed by the People's Bank of China, and lastly, the Federal Reserve, he added.
El-Erian said the Fed opened the door "a little bit" to a June rate hike by removing comments in its statement Wednesday about risks from overseas.
"If the markets continue to behave, I think we will get a June hike," he said.
Central banks have been "great" at delivering financial outcomes, if not economic results, in recent years, according to El-Erian. But he now believes policymakers will soon find it difficult to provide support even on the financial front.
Investors should prepare for the end of an era in which growth has been low but stable and central banks have repressed financial volatility when it rises too much, he warned.
"I think we're coming to a point where both of these things are being questioned, so name-specific elements are going to be important. Tactical trading may be as important as strategic positioning, and cash will be the only risk mitigator in your portfolio," he said.
In the current range bound world, strategic trading won't yield the returns investors are looking for, and they must embrace a more tactical approach, he said.
El-Erian says he likes companies like Facebook that provide content and establish a dominant platform.
"There are very few of them, but they're going to take you for quite a ride because that is a very powerful equation," he said. He disclosed that he recently bought shares of the social media giant.
El-Erian said the biggest surprise has been that three "unhinged markets" — high yield, currencies, and commodities — did not contaminate the rest of the financial sector. Those asset classes now rank among the top tactical trades, he said.