The BOJ's message is to maintain ultra-loose policy, but the actual actions are clearly inconsistent

　　Kazuo Ueda, governor of the Bank of Japan, is set to press ahead with his plan to phase out ultra-loose monetary policy while continuing the "dovish" tone of his predecessor Haruhiko Kuroda.

　　This is an inherently risky plan that requires clever execution. With external factors such as conflicts in the Middle East and the US economy uncertain, the BOJ will need some good luck to succeed in its mission.

　　Earlier this week, the Bank of Japan announced another adjustment to its Yield Curve Control (YCC) program, which changed the "strict ceiling" on Japanese 10-year government bond yields to an "accommodative ceiling."

　　That means the BOJ has withdrawn its commitment to defend that level by buying unlimited amounts of bonds, and will then be more flexible in its bond-buying operations to push down yields. Outside analysts said that the Bank of Japan has taken a small step toward exiting the large-scale monetary stimulus policy of the past 10 years.

　　One source said: "The BOJ's current message is to maintain ultra-easy policy, but the actual action is clearly inconsistent."

　　Another added that the bank may be planning to wait until next spring to normalize policy, which could explain why they kept a dovish tone on guidance."

　　Yen risk

　　Due to the existence of negative interest rates, the yen exchange rate is significantly lower after a "small step". If the yen continues to fall, some analysts say, it will further push up the price of imported goods and the cost of living for households, putting political pressure on the central bank to raise interest rates soon.

　　The source explained that Ueda's experience as a policy maker would have made him well aware of the challenges.

　　Robert Samson, co-head of global multi-asset at SMBC Nikko Securities, said: "They will still choose to pay some price to get out of a deflationary predicament that has lasted more than 30 years." They want to avoid a 'one-off' solution, and an incremental approach will be their first choice."

　　Steering problem

　　The boj's next priority is to end negative interest rates - raising short-term rates from minus 0.1 per cent to zero. Exiting negative rates is more important than ending YCC, as the move signals a shift to a more neutral policy stance.

　　Many BOJ officials expect the move to be made around spring next year, when annual wage negotiations are also expected, the sources said.

　　Against a backdrop of aggressive rate hikes by global central banks, the BOJ's shift remains a dovish outlier and could jolt markets by causing a flood of Japanese money to return. Even the slightest hint of an exit from the central bank could trigger a bond sell-off, inflicting heavy losses on investors and raising the cost of financing Japan's huge public debt.

　　"There are still a lot of hurdles to clear before the exit, which means you don't want the market to get too excited about an early launch," a third source said.

　　However, Hiromei Yamaoka, a former central bank official who worked with Mr Ueda, said: "The BOJ may not be able to wait that long because the situation around inflation could change dramatically. The boj is running out of time, which Kazuo Ueda may have noticed."