Central bankers crave credibility; without it, they cannot influence the market. Usually, earning the credibility has come by killing off incipient inflation to protect, as necessary, the country’s currency.

Not in Japan. There the Bank of Japan has the opposite dilemma. The yen, if anything, is too popular as a safe haven. A strong yen has tended to increase deflationary pressures and stifle economic growth, not to mention hurting key export industries.

If anything, the BoJ is a central bank trying its best to make the yen a bad choice for investors. And, boy, has it tried, using multiple policy tools to disappoint, and encourage more inflation.

That worked, for a while at least. The yen fell and inflation picked up; the Topix share index more than doubled.

Unfortunately for the BoJ, inflation expectations reversed last year. Then in January it joined other central banks in applying a negative interest rate policy to make holding yen in banks positively costly. That didn’t work: the yen stayed more or less put.

On Wednesday came the latest pronouncement, yield curve control, aiming to push up long bond yields relative to short-term interest rates. In the hope of helping banks, hurt by negative interest rates, the BoJ would widen the (positive) spread between short and long-term yields.

Most banks make their money on arbitraging cheap depositor money and lending it out long term at higher rates. A steeper curve has led to better performance of Japanese bank shares. That sector has outrun the broader market when the curve has steepened in recent years. Wednesday was no exception as bank shares were the best performers.

Foreign exchange traders, though, did not care much and the yen was unchanged after a brief dip. Indeed, Paul Lambert at Insight Investment thinks the BoJ has so many targets — inflation, currency, negative interest rates and yield curve shape — that it’s distracting. The yen is more likely to drift higher under such confusion.

The BoJ deserves plaudits for creativity in trying to curtail Japan’s deflation problem. But this latest policy move looks more likely to complicate its efforts.

alan.livsey@ft.com



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