JAPAN: Monetary Policy - Thoughts on upcoming MPM announcements

Well the buzz this week for the Japanese market is the pending announcement by the BOJ where analysts are expecting a change in their Monetary Policy because of sustained positive CPI. Likely a move from QE but maintaining of ZIRP. The BOJ is being murky at best with it's recent announcements, and I think a good deal of it has to do with managing credibility and expectations so as to emerge with low inflation and a expansionist monetary policy.

Taking a page from any Economics textbook on monetary policy we take a quick look at the role of the central bank, policy, and the market agents (consumers and producers).

A Central Bank is often created to establish credibility with market agents that monetary policy is independent of government influence (to the extent that monetary stability will not waver with government elections/power changes).

In the case of the BOJ, it's mandate is (link):
1) Issue Banknotes and carry out currency and monetary control.
2) Ensure smooth settlements in financial system
3) Pursue Price Stability.

What I'm reading here is use currency and monetary control to target price stability.

Well back to text-book Monetary Policy (Keynesian style):
Central Bank policy to maintain low inflation.
-Market Agents accept this and anticipate future prices to be low.
-This then results in wages remaining low.
-Cost of Goods also remains low as producers are paying low wages.
-So aggregate demand does not outstrip aggregate supply, no supply-shock either and with expectations adapting for continued low inflation, everything sails along.

If Market Agents don't believe the Central Bank
-Market Agents expect prices to increase
-Wage-setting centers on higher inflation
-Between Wage-Spiral, demand side shock and supply-side shock, inflation hits.

Now the key here is credibility. The Central Bank of course wants to target low inflation, it's whether the market agents believe the Central Bank.

Now the tricky part and the direction that the BOJ is trying to go is:
-Central Bank targets low inflation
-Market Agents accept this, wage setting remains in check
-Central Bank concurrently expands the money supply (expansionist monetary policy) to stimulate growth and increase output. The increased output outweighs the rise in inflation caused.

-Of course, if Market Agents anticipate the Central Bank anticipating their low inflation wage-setting, they will instead wage-set up, negate the increased output, and you end up with inflation but with no real output gain.

Then again this is postulated around rational expectations which isn't exactly rational all the time. Behavioral expectations plays a part, as does employment levels (when demand shock hits, supply will increase, until full employment reached),
even wage-setting is dependent on the market agents being able to set wages).

This then ties into my belief that the paradigm of global economics has totally changed (see my paper). Not only is the wage-setting mechanism out of flux (currently at my 9to5, i know inflation is on the rise, since gas is up about 30% at the pump, but I can't bargain for higher wages, realistically though) because of the new global labor arbitrage emerging from India (service) and China (manufacturing). Technology is making this possible and at the same time enhancing worker productivity without the corresponding increase in wages, hence the low inflation environment world-wide. Financial market depth and interoperability has also allowed for loose monetary policy to drive global output given a fixed expectation of wage-setting failure.