Wednesday, September 19, 2012

Japanese central bank announced QE measure

First, ECB announced Outright Monetary transaction (OMT), the unlimited bbuying of 3-year bonds issued by Eurozone peripheral states. Next, Fed chimed in with QE3or as one analyst called it- the Unlimited QE, where Fed will buy bonds until the labor market improves "substantially." At a press conference, Bernanke clarified that the Fed’s “response to economic conditions might be one way in which we could further provide accommodation”; thus signaling that the Fed may adopt even more aggressive measures along the lines of the Evans 7/3 rule or even a nominal GDP target. The Evans 7/3 rule is simply: The Fed won't stop easing until unemployment is at 7% or core inflation is at 3%. And a nominal GDP target is just that, a target for the total size of GDP, something that can be achieved by either raw growth or inflation. (For more on this, go here).

Now, Japanese central bank announced a new JPY10 trillion QE program to prod up its slowing economy. While slower economic growth may be the main reason for the latest QE move by the Japanese central bank but I feel that it could also be driven by the need to suppress any rise of JPY via-a-vis USD & Euro. Are we seeing the start of a beggar thy neighbor policy to devalue the currency to get greater share (or to retain share) of the export market?

This QE measure by the Japanese caused a 1.19-jump in Nikkei today to close at 9232. From the chart below, we can see the index can swing all the way to 10000 if it can surpass the horizontal resistance at 9250.

Chart: Nikkei's weekly chart as at Sept 18, 2012 (Source: Stockcharts)

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