While one QE program (the Fed) may be approaching its end, another one (Bank of Japan) is about to see its efforts elevated. When conventional interest rate cuts are ineffective in reviving an economy, a central bank will go into its bag of tricks to find ways of stimulating its economy.
SPOTLIGHT ON BOJ
Wednesday late night, the spotlight will shine heavily on the newly appointed Bank of Japan Governor, Haruhiko Kuroda. Last night, Mr. Kuroda told the Lower House Parliament that bold monetary policy is needed. With near zero rates, everyone is expecting an enhancement to the central bank’s easing efforts.
A LITTLE BACKGROUND
The Japanese economy is suffering from 15 years of falling prices, real wages and land prices. While the recent precipitous fall in the yen has been a trade that has benefited several hedge funds, the time is near where the markets have set a bar that is very high.
BIG PURCHASES
In the spring of last year, the BOJ increased their asset purchases by five trillion yen to prevent the dollar/yen (USD/JPY) breaking below the 80 level and they failed. In the summer, they increased it by another five trillion to prevent the 79 level from being breached and they struck out. In the fall they increased purchases by 11 trillion and they finally succeeded and eventually saw USD/JPY rise above the 80 level.
BOTTOM LINE
If we see anything less than additional 10 trillion yen tomorrow, the FX markets will be disappointed and we may see further pressure on USD/JPY. Key support will come from the 23.6% Fibonacci retracement level at the 92.00 level on our daily chart. Ultimately, we see a more range bound USD/JPY for the next quarter between the 89-95 zone.
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