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Bank of Japan's Kuroda warns against complex forward guidance

Bank of Japan Governor Haruhiko Kuroda
Tomohiro Ohsumi | Bloomberg | Getty Images

Bank of Japan Governor Haruhiko Kuroda said central banks should avoid offering overly complicated forward guidance on their policies, warning that doing so could disrupt financial markets and prove to be counter-productive.

He also said that exiting from the current ultra-easy monetary policy may be more difficult than when the BOJ last ended its quantitative easing in 2006, because the bank now loads up on more long-term government debt and risky assets.

"The day of constructive ambiguity is over and transparency is extremely important to avoid unnecessary shock to the economy," Kuroda told a seminar at the University of Tokyo.

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But he added that offering complicated messages to markets, which are diverse and consist of various participants, may have unintended consequences.

"Too complicated forward guidance, or too complicated communication, could be less efficient and sometimes even disruptive," he said on Saturday.

Many central banks, including the U.S. Federal Reserve and the Bank of England, have resorted to "forward guidance" in lowering long-term interest rates, which is to offer guidance on how long they will maintain their ultra-loose policies.

But the Fed was criticized as misguiding markets when it held off on tapering its massive stimulus, despite offering signals in May that it may do so in coming months.

Kuroda has insisted on keeping the BOJ's message simple, which is to maintain its massive stimulus until 2 percent inflation is achieved, and has refrained from offering specific information on what will trigger an exit from that policy.

The BOJ offered an intense burst of monetary stimulus in April, pledging to double base money via asset purchases to achieve 2 percent inflation in roughly two years.

That was a departure from the approach of Kuroda's predecessor, who offered incremental stimulus in response to slumps in the economy.

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Kuroda reiterated that the BOJ's experiment was having the anticipated outcome on the economy, stressing that the economy was on track toward achieving the bank's price target.

Compared with its previous quantitative easing launched from 2001 to 2006, the BOJ now buys far larger amounts of government bonds with longer periods until maturity.

That means ending the current policy may be more difficult than in 2006, Kuroda said, as it will take longer for such long-term debt to fall off the BOJ's balance sheet.

Still, he stressed that there was no substantial difference in the difficulty of ending conventional easy policy, which manipulates short-term rates, and unconventional policy that tries to influence long-term rates with asset purchases.

"Even when you deploy a traditional, short-term interest rate policy, exiting from ... prolonged monetary easing would not be easy," he said. "The main difference ... is that we have very few experiences" on ending unconventional policies.

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