BOJ Has Chosen ‘Forward Guidance’ for Global Markets

(Bloomberg) — The Bank of Japan’s newly introduced forward guidance was drafted with overseas investors in mind, reflecting an effort to avoid any sharp reaction in the yen and stocks, according to people familiar with discussions at the central bank.

The term forward guidance and the headline to the BOJ’s July 31 monetary policy statement were first written in English, rather than Japanese, said the people, who asked not to be identified as the matter is private. The central bank, which releases key documents in both languages simultaneously, typically starts in Japanese before translating into English.

BOJ officials were concerned that the adjustments being announced that day — which they characterized as an effort to make policy stronger and more sustainable — could be interpreted by overseas investors as steps toward tapering the monetary program, said the people.

Forward guidance was placed near the top of the policy statement to help mitigate the risk, they said.

As well as people reading in English, investment firms around the world are increasingly using computer programs to read statements posted on the Internet and then to make automated trades. These programs are often geared to search for key words that indicate policy direction.

The term forward guidance is well understood by international investors and closely associated with the U.S. Federal Reserve and the commitment it made after the global financial crisis to keep interest rates low for an extended period.

Stocks and currency markets remained relatively calm on July 31.

Having had six weeks to fully digest the BOJ’s policy changes, nearly 80 percent of economists surveyed by Bloomberg now view them as “stealth tapering.”

The central bank’s next board meeting is Sept. 18-19. Economists are unanimous in projecting that it will leave policy unchanged at the conclusion of the gathering.

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