The bumpy road to rate hikes: Bank of Japan seeks to improve communication with the market

Intelligent Finance App noticed that, in addition to the mixed signals released during the meetings of the International Monetary Fund (IMF) and the World Bank in Washington, Japanese central bank Governor Haruhiko Kuroda also made an appearance, where the central bank reflected on how to better communicate with the market.

The market criticized the unexpected rate hike by the Bank of Japan in July, which exacerbated the market crash in early August. Kuroda pledged that if the 2% inflation target can be consistently achieved, the Bank of Japan will continue to raise interest rates.

Although the direct trigger for the August bond sell-off was weaker-than-expected US job market data, causing concerns that the Federal Reserve should have started cutting rates earlier, this experience prompted internal discussions at the Bank of Japan on how to avoid future rate hikes becoming a major market surprise.

It is certain that Bank of Japan officials stated that if inflation aligns with expectations, the central bank will "adjust the degree of monetary easing," thereby downplaying the possibility of a rate hike in July.

However, these signals did not resonate with many market participants, who believe that consumption is too weak to justify a rate hike.

For Bank of Japan Deputy Governor Ryozo Himino, the issue lies in the central bank's ambiguous technical language, which the market finds difficult to digest.

Earlier this month, he said at a seminar in Tokyo, "Communication is not about what we want to convey, but about what people actually understand." "I remember being confused by the 'Bank of Japan's statements' when I joined the Bank of Japan a year and a half ago."

Reserve Bank of New Zealand Governor Adrian Orr seems to agree with this view, explaining that central banks "need to tell a story that people can understand."

Orr spoke during the IMF meeting gap, saying, "They need to show empathy - look at issues from the perspective of the public and speak in plain language."

However, in the weeks leading up to the rate hike in July, Kuroda did not remind financial media and the market of the Bank of Japan's basic policy strategy in public.

He said at a seminar at the IMF last Wednesday, "There was a period in July when there was no communication between the board members and the market and media, whether explicit or formal."

When asked what different measures the Bank of Japan could take, he said, "Although we may have said the same things as in June, it would be better if we could say more in July."

No Perfect Solution

In addition to press conferences after holding eight policy meetings each year, the Bank of Japan Governor gives a speech at fixed events approximately every two to three months.

Each of the nine board members gives about two speeches per year outside of Tokyo. The schedules for these events are pre-arranged and hardly ever change.

In July, the Bank of Japan could have used such events to convey their views to the market.

Meanwhile, policymakers from the Federal Reserve and the European Central Bank often give speeches at dozens or more public events during meeting breaks.

From the September meeting to the "quiet period" before the November 6th to 7th meeting, Federal Reserve officials made speeches at least 40 times in public appearances. Just last week, two-thirds of the European Central Bank Governing Council members made public speeches, with some appearing three times or more Some members of the Bank of Japan's policy board have proposed increasing media opportunities or enhancing market intelligence at the Bank of Japan.

However, if each policy maker has a different interpretation of the data when deciding whether to raise interest rates, it may be challenging to communicate with a unified voice.

"We cannot telegraph all of our future actions in advance," said Katsuo Ueda. "What we can do is carefully explain our economic outlook and explain our basic monetary policy strategy."

Not all external observers believe that the Bank of Japan lacks in communication.

For example, Nada Choueiri, head of the International Monetary Fund's mission in Japan, believes that the Bank of Japan's way of conveying its policy intentions is not a problem.

"The Bank of Japan has always stated that they will remain flexible and rely on data. They explained in their monetary policy statement that the upside risks to inflation have increased," she said. "This is a good reason for a rate hike in July."

"The trigger for the market turmoil in August was actually the U.S. economic data, not the Bank of Japan's policy, and certainly not their communication."

The work of finding solutions may continue and could lead to the Bank of Japan changing the way it communicates information, such as increasing the frequency of media interviews with its senior executives.

"There is no magic bullet for better communication. Each method has its pros and cons. What I want to say is that the board members have not yet reached a clear consensus on the methods to be taken in the future.

"But I can testify that we all have a strong desire to learn from what has happened and strive to do better."