Banks may have to dole out shock therapy

New BOJ governor Haruhiko Kuroda committed the bank on Thursday to open-ended asset buying and a dose of shock therapy which sent the yen reeling and Japanese government bond yields to a record low.

Mr Dale told an academic conference that it was still generally best to try to ensure that markets understood how a central bank behaved, rather than to regularly surprise them.

But in response to a question on the BOJ, he said that sometimes shocks were unavoidable if markets misunderstood a central bank, or a central bank needed to shift policy rapidly.

“If people’s perception of your reaction function is incorrect, you may want to find ways of somehow demonstrating that,” he said. “But if you’re comfortable that their perception of your reaction function is fine, then I don’t think you want to.”

The Bank will have a new governor of its own in three months’ time. It will have to consider how much to prepare markets for any new policies once Mark Carney, who currently heads the Bank of Canada, succeeds the incumbent Sir Mervyn King.

Chancellor George Osborne altered the BoE’s remit last month to give it clearer leeway to ignore temporarily above-target inflation. He has also asked Mr Carney to look at the case for long-term commitments on loose policy, something pursued by Canada and the United States.

Mr Dale did not say publicly whether he supported the BOJ’s shock move, which has met with a cool response from some eurozone policymakers who are concerned about a weak yen hurting eurozone exports.

But in the past the Bank has been relaxed about BOJ policies aimed at reflating Japan’s stagnant economy, even if they weaken the yen as a side effect.

Many economists expect the Bank to restart its programme of government bond purchases with newly created money, which bought £375bn gilts between March 2009 and October 2012.

Mr Dale voted against the start of the central bank’s most recent bond purchases in July 2012.