So this is it. The strong, bold, courageous, (insert own description here), monetary policy that Shinzo Abe and Kuroda wanted has been announce. Let us see what is so bold about it:
1) BOJ wants to double monetary base in 2 years - 200 Trillion monetary base for 2013 and 270 trillion by end 2014
2) Current Asset Purchase Program retired, replace with monthly regular purchase target of 7 Trillion Yen
3) 'Banknote Rule' suspended, BOJ will be able to buy long term JGBs
Are these truly revolutionary?
Well, buying longer-maturity JGBs gives BOJ flexibility in their choice of purchases, as they will now be able to purchase maturities all the way up to 40-years. Previously the limit was only 3-year maturity, having a long maturity allow BOJ to attack the tail end of the yield curve directly, making the stimulus effect last longer. Doubling monetary base in theory should help inflation as amount of currency units in circulation will increase. However, given the cultural context of Japan where savings culture is high, it is highly likely that consumption rate and inflation rate may not rise in proportion. At most, we could see more bank deposits which should bring down borrowing costs for banks, if not for the fact that borrowing costs are already close to 0.0%. Lastly, the already agreed monthly purchases starting in 2014 calls for 13 Trillion Yen purchases each month. Kuroda has promised that he will want to bring forward start date of the program earlier, has he delivered on the promise by coming up with a smaller monthly purchase plan?
Well, the market thinks that Kuroda has delivered well. He has mentioned earlier this week that BOJ must "deliver on market speculation". Looking at how USD/JPY rallied after the announcement, it is clear that the speculators are pleased. Price has cleared the 94.0 resistance, with further short-term resistance around 94.5. Amazingly, the >100 pip rally did not push readings into the overbought region, suggesting that price can still potentially head higher. However, it is likely that readings may peak in conjunction with a test of 94.5, which may result in price trending within last Thurs-Friday consolidation as traders digest the BOJ news.
Stochastic reading on the Daily chart suggest the opposite. Readings are bottoming just when price is testing the 94.5 level, suggesting that a break from here may have strong follow-through towards 96.5 and potentially beyond. As USD/JPY has been trending up, more consideration should be given to the daily chart readings which agrees with the trend rather than the short-term chart which is anti current flow.
Moving forward, the 96.5 level will be critical even for BOJ firm supporters. Ability to break the pre BOJ announcement high back in early March will help to spur more bullish flow, while the failure to re-test 96.5 will weigh heavily on price similarly to how QE3 announcement has failed to reinvigorate Gold prices.
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