After the Bank of Japan announced a ¥200 trillion yen target by the end of 2013 in base money stock on April 4th under the new term "quantitative and qualitative monetary easing (QQE)," the USD/JPY broke out of its session range to the upside for several days, causing a massive yen depreciation. The Japanese yen lowered against all of the major currencies.
The Japanese market reacted quite well to the announcement of the QQE approach, consistent with the previous high correlation between yen depreciation and the Nikkei 225 appreciation that we have seen in the past 6 weeks:
Is this upward trend in Japanese equities justified?
We believe that the quantitative and qualitative monetary easing approach that the Bank of Japan is taking could have more than short-term positive effects on equities. While only monetary policy cannot fix the structural problems of Japan (like the absence of institutions that promote innovation and entrepreneurship, the low female labor force participation rate and even lower fertility rate), it could be strong enough to vanish deflation and bring the exporter driven manufacturing industry back to profit.
Add to this the fact that the Abe administration is expected to announce further regulatory and structural reforms by May-June in an attempt to complement quantitative easing with sound fiscal policy. These effects are strong enough to justify a Nikkei 225 worth 15000 yen by the end of this year.
The QQE Announcement
The announcement, made on April 4th, included the following crucial points:
- An explicit target for the base money stock: ¥200 trillion by the end of 2013 and ¥270 trillion by the end of 2014.
- Increase in private asset purchases. ETFs will be purchase at a rate of ¥1 trillion per year, and REITs at ¥30 billion per year.
- Net purchases of JGBs: ¥50 trillion per year, and a balance sheet expansion of approximately ¥70 trillion per year (¥6 trillion per month).
For those who are not aware of the dimensions of the announcement, it basically involves doubling the size of its current asset purchasing program over the next 2 years. The bank will also extend the maturities of the bonds it purchases. Now it becomes clear why the announcement sent the euro and dollar soaring against the yen.
Events This Week
|5:30||JPY Industrial production (MOM) FEB F||Low||-||Monday 15th|
|5:30||JPY Industrial Production (YoY) FEB F||Medium||-||Monday 15th|
|5:30||JPY Capacity Utilization FEB F||Low||-||Monday 15th|
|7:00||JPY Machine Tool Orders (YoY) MAR F||Medium||-||Monday 15th|
|7:15||JPY Bank of Japan Governor Kuroda Speech||Medium||-|
What To Expect
Economy: We think that the releases of key economic data scheduled for Monday will not be worse than expected. The high expectations on long run positive spoilovers of monetary easing will not lower.
In the long run, we believe that the combination of QQE and fiscal policy (Abenomics) will have the power to delivery an economic growth rate of 2% for 2013, a massive success, considering that after 1990 the Japanese economic growth rate has averaged 0.5%.
USD/JPY: There is a psychological resistance at 100 which is being constantly challenged. However, the long-term trend is bullish. We expect a move towards 101.5-101.9 in the next 3 days, with a medium probability; and we expect the 100 benchmark to break this week (with a high probability), despite being a historical psychological level for traders.