* Fed's average inflation target affecting BOJ's
* BOJ clarifies easy policy stance even as it tapers asset
* BOJ releases analysis showing make-up of 2-5 years
* BOJ may be stuck with commitment with questionable effects
TOKYO, June 3 (Reuters) - The U.S. Federal Reserve's recent
commitment to keep interest rates low despite creeping inflation
has created new headaches for the Bank of Japan, which is trying
to quietly wean the economy off its massive stimulus.
The Fed in August reframed its objectives amid the pandemic
recovery, allowing consumer prices to rise faster than would
have been tolerated by the U.S. central bank in previous cycles.
While the BOJ, a pioneer of quantitative easing, has
maintained extremely accommodative settings for decades, its
operations are still guided to a large extent by how Fed policy
affects global interest rates.
Worried that a dovish Fed could compromise Japan's own
efforts to keep market rates near zero, the BOJ at its March
policy meeting sought to match the U.S. pledge to do just that.
For BOJ policymakers, that meant breathing new life into its
elusive 2% inflation target, making it harder to walk away from
past commitments to maintain massive stimulus.
The move highlights the huge influence Fed decisions have on
the BOJ's communication, as Japanese policymakers feel the need
to stay in line with global monetary policy trends shaped by the
world's most powerful central bank, say sources familiar with
"It was something the BOJ had to clarify after what the Fed
did," one of the sources said, a view echoed by another source.
"The BOJ's commitment has become more binding and harder to
phase out," a second source said. The sources spoke on condition
of anonymity due to the sensitivity of the matter.
That dovish signalling comes at an awkward time.
While the BOJ needs to maintain enough support to help the
economy get through the pandemic, it also faces pressure to get
rid of an unpopular negative interest rate policy that has hurt
financial institutions' profits.
In response to criticism its huge buying was distorting
market prices, the BOJ has also been "stealth tapering" its
purchases of government bonds and risky assets.
But the Fed's emphasis on keeping interest rates near zero,
and tolerating above-target inflation potentially for years, is
dashing the BOJ's hopes of quietly phasing out a commitment to
keep pumping money until inflation "stably exceeds" 2%.
By stressing a commitment identical to that of the Fed, the
BOJ may find it harder to slow money printing even when the
economy emerges from the pandemic, suggesting it will lag far
behind its counterparts in ending crisis-mode policies.
The Fed's new average inflation targeting, unveiled in
August, would see U.S. policymakers tolerate inflation exceeding
2% for years before raising current near-zero interest rates.
The BOJ has had a similar but looser and mostly symbolic
commitment in place since 2016, in which it pledges to keep
expanding the amount of cash circulating in the economy until
inflation stably exceeds 2%.
Unlike the Fed, the BOJ does not tie the commitment to
interest rates. To avoid binding future policy, the language is
kept vague, with no references to the pace of asset purchase or
for how long inflation needs to overshoot the target.
That flexibility had allowed the BOJ to distance itself from
the target amid mounting doubts about whether it could be
But the Fed's explicit shift to an average inflation target
has now forced the BOJ to give more weight to its own
commitment, a setback for the BOJ's efforts to walk back
Governor Haruhiko Kuroda's "bazooka" stimulus that had failed to
fire up inflation.
A month after the Fed's August decision, Kuroda said the
BOJ's commitment was consistent with the Fed's thinking on
inflation targeting, suggesting that the BOJ's pledge already
incorporated key elements of the Fed's new strategy.
Firming up the alignment, the BOJ this week published a
detailed analysis on how imitating the Fed's strategy would help
hit its price target faster.
The analysis estimated that making up for about two to five
years of past weak inflation could be most effective, suggesting
that Japan won't see an exit from ultra-easy policy for years
even after inflation perks up.
That would come as little surprise for market players
already expecting policy to remain ultra-loose for years.
But it could also force the BOJ to maintain a commitment
many analysts see as having little effect in changing public
perceptions on prices.
"What has become clear is that it's impossible to control
something like inflation expectations, which are hard to
measure," said Miyako Suda, an academic who served as a BOJ
board member for a decade until 2011.
"The BOJ needs to offer a more candid assessment on why its
huge stimulus package didn't work as intended."
(Reporting by Leika Kihara; Editing by Sam Holmes)