TOKYO If and when the Bank of Japan should reveal its plans to exit its ultra-loose monetary policy has split economists polled by Reuters, with the economy showing signs of recovery even though inflation remains far below the central bank's target.
The economists are also divided on the central bank's ability to communicate its exit strategy without causing market turmoil.
After three years of massive asset-buying failed to lift inflation, the BOJ switched tactics last year to target long-term interest rates through its buying of Japanese government bonds.
So far, this tactic has also failed to spur inflation to anywhere near the central bank's 2 percent target rate.
But with signs of economic improvement, talk is emerging about the central bank's exit strategy - how and when it will start to taper its massive bond-buying and raise interest rates.
The central bank faces a tricky balancing act. It must convince markets it has a game plan, but if it reveals too much too quickly, investors could send bond yields sharply higher and destabilise the market.
Last week, the head of Japan's life insurance lobby called on the BOJ to begin as soon as possible to openly debate how it will bring ultra-easy monetary policy to an end.
Some economists have urged the bank to reveal small parts of its strategy a little at a time to communicate adequately but without spooking markets.
"It would have a huge impact on the economy and financial situation if the BOJ shows its exit strategy now," said Kouki Sakano, analyst at Dogin Regional Research Institute.
"The risks are too big for the BOJ to continue its extraordinary monetary easing as its 2 percent inflation target is not realistic. It would be better if the BOJ would indicate 'step' options towards an exit little-by-little - or at least show the markets that the bank is discussing a strategy."
Fourteen of 35 economists surveyed said the BOJ should disclose its approach at an early stage; 17 economists said the central bank does not need to do so, and four selected "other" in the poll taken from June 6 to June 13.
"The BOJ has not illustrated or suggested what it would do or would consider in the course of price rises. The bank should compile and unveil its current thinking to avoid market confusion," said Mari Iwashita, senior market economist at SMBC Friend Securities, and one of those who advocates early disclosure by the bank.
Analysts were also divided on the BOJ's communication ability. Fourteen of 34 analysts said they were sceptical that the central bank could send messages that would avoid market turmoil when it plans to exit, while 13 said they had no such concerns.
The BOJ passed a new milestone this month when its balance sheet topped 500 trillion yen, roughly the same size as that of the U.S. Federal Reserve, having more than tripled since it started aggressive stimulus in 2013.
A spike in bond yields, sending prices lower, could leave the bank with big losses on its balance sheet. Also, when the BOJ tightens policy, the bank would have to raise the interest it pays on commercial banks' excess reserves even though it would earn less from the low-yielding government bonds it holds.
Nineteen of 35 analysts polled said they were concerned about the chance of a negative impact on the economy from possible losses incurred by the BOJ, while 16 were not.
Thirty-one of the 35 economists surveyed believed the BOJ's next major move would be to withdraw from its extraordinary policy. Most said this would be at some time next year or later.
The BOJ is set to keep monetary settings unchanged at the end of its June meeting on Friday and reassure markets it will lag way behind the Federal Reserve in dialling back its massive stimulus programme.
Analysts also forecast the core consumer prices index, which includes oil products but not fresh foods, will rise to 0.7 percent in the fiscal year to March 2018 and 0.8 percent the following year.
The economy will expand 1.3 percent in the year to March 2018 and 1.1 percent in the next, they project.
(Reporting by Kaori Kaneko; Polling by Shaloo Shrivastava and Khushboo Mittal; Editing by Malcolm Foster and Eric Meijer)