BoJ Aggressive Monetary Policy | USD/JPY Technical Analysis

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Chinese new year is right around the corner but we still have economic beats coming out of Asia. This might come as a surprise to many of our American followers, but when we talk about Asia, we don’t only mean China. Yeah I’m being a bit cynical. But we are looking for some dance moves from Mr. Japanese Yen as Bank of Japan takes the stage with their policy statement Wednesday.

The Nikkei hit its highest level since July 2007 overnight. Markets in Asia have been very thinly traded because of the lunar new year celebrations, but those who were in the office managed to get Japan’s stock index back above pre-global financial crisis levels as the Bank of Japan decided to keep their ultra aggressive monetary policy in place, and also upgraded their outlook on the economy, citing stronger exports as a principle driver.
There are a bunch of stuff we already have learned about Japan’s economy this week.


No More Recession for Japan

On Monday Japanese GDP release came out weaker than expected, but the good news was that it had expanded by 0.6% in Q4 2014, which means Japan is officially out of a recession. Yay!

That is despite the fact that the actual figure came in weaker than the estimated 0.9% growth figure. To top it off, the previous reading was downgraded from -0.4% to -0.5%.

Spending Still Hurting From the Tax Hike

But it’s still not all good for Mr. Japanese Yen. Consumers have still been unable to recover from the sales tax hike last year so both household spending and retail sales came out much weaker than expected.

Close to a year has passed since the Japanese government decided to increase the consumption tax from 5% to 8% in April 2014, leading to higher tax-inclusive prices of goods and discouraging consumers from spending.

Currency Wars Continue

As I have covered before, most major currencies are dragged into a  war because of their central banks easing policies in order to keep their counter currencies weak.  You see, a weaker local currency lowers its purchasing power, which means that consumers would have to pay higher prices for the same products, pushing inflation up. In the forex world, a weakening local currency means that other counter currencies become relatively stronger, which means that a central bank must be ready to step up its easing game if it wants to prevent its own currency from strengthening. And it’s definitely in Japan’s favor to have a weaker currency rather than a strong one.

Japan’s policy makers have remained optimistic and have been sending out joyous expectations for the Japanese economy. There is a chance that we see another easing this week from BoJ to increase stimulus in order to boost inflation.

Technical Analysis

On the forex dance floor, a weaker Mr. Japanese Yen means higher dance moves of Ms. USA against him, and we have already seen a bounce back above the 23% Fibonacci level at 116.71 on the daily dance floor, followed by a spinning top and a break above the Ichimoku cloud which could be an indication of further up-moves with targets back at 120.465 and 121.625 in extension.




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