Here is an interesting question, would you loan money to anyone for 10-year for less than half of 1% per year. Sound ridiculous, but it’s the case in Japan as of Thursday. The 10-year JGB has climbed in price to the extent that yields have dropped to 44 basis points which is less than half of 1%. With this huge decline in rates, the USD/JPY has rallied significantly putting significant pressure on the Yen which is one of the goals of the Bank of Japan.
The BOJ pushed through easing measures that even surprised the savviest investors. The central bank switch its policy from repurchase overnight funds to the monetary base which is cash and bank deposit, which generated significant positive momentum. By switching its target the BOJ is directly targeting inflation which comes about when money supply turns over quickly. If the BOJ plans on increasing purchasing which will add to the velocity of money, then inflation will move to their targeted range. The monetary base was at a record in 2013 but the BOJ was unable to get this capital to spill over into the real economy, but this new action might do the trick.
The BOJ in its statement says it plans to double the base over the next two years. The central bank intends to buy enough bonds and assets to pump the base to 200 trillion Yen by the end of 2013 and 270 trillion Yen by the end of 2014. The goal of the Bank of Japan is to lift inflation above their 2% target by increasing purchases of Japanese Government Bonds with longer maturities, which could include the current 40 year bonds. They are also likely to purchase riskier assets such as ETF’s that are tied to both the equity markets and real estate.
The surprise move by the BOJ not only depressed the Yen but it lifted the Nikkei which was down more than 1.5% in early trading. After rallying more than 3% on Wednesday, most market participants believed that the BOJ would under deliver, which generated the early selloff. After the announcement the Nikkei snapped back moving higher by 4%, and closing up slightly more than 2% for the trading session. The broad index is up more than 5% in the last two trading session, which is a reflection of continued easy money.
The USD/JPY currency pair which moves higher as the Yen declines in value, shot higher in heavy volume after the BOJ announced their new monetary policy. The currency pair moved higher by nearly 3 big figures slicing through resistance near the 10-day moving average which had held for the past two weeks. Resistance on the currency pair is seen near the recent March highs at 96.71.
Momentum is changing with the trajectory of the MACD pointing to a possible buy signal. If the index moves from negative to positive territory, the MACD will be pointing toward positive price action. The RSI has moved quickly from the 40 level to slightly above 60 which is still well below the 70 trigger of an overbought condition.