They say that how much a man is loved can be seen by the number of people who mourn at his death. If that is the benchmark, BOJ’s current Governor Masaaki Shirakawa will be feeling lonely even though Valentine’s day is just round the corner. After announcing that he will be stepping down in March, Nikkei opened 2% higher, and USD/JPY pushed above 93.0 as market hoped that a fresher BOJ Governor will be able to spearhead a stronger and faster attack against the “Lost Decades” in which asset prices faced years of continued deflation.
Shirakawa’s early departure is surely considered too late by his detractors, which include current Prime Minister Abe which went on record to criticize Shirakawa, saying that it is considered “lucky” that the Governor’s term was ending soon.
That is right, BOJ was supposed to change the Governor soon anyway. How soon? How about in 8th of April soon?
Suddenly, the bullish reaction from market appears to be a tad knee-jerk-ish in nature. Shirakawa has simply accelerated his departure by 3 weeks, not 3 years and not even 3 months. Is the market so parched from monetary easing policies that such a non-event can propel Nikkei and USD/JPY to new 2013 highs? Nothing has changed fundamentally – Shinzo Abe’s “Grand Plan” to save Japan has already been put into place with BOJ adopting a 2% inflation target when Shirakawa was still in charge. Even if Shirakawa was opposing “Abenomics”, the PM has threatened to amend the constitution around BOJ such that BOJ will have to carry out stronger measures. Though extreme, legally it is not impossible especially when supporters of Abe outnumber those of Shirakawa (if any still exists).
It is also highly unlikely that the new incoming BOJ Governor will increase the inflation target, or implement new polices immediately after sworn into office. With the new Governor not yet chosen, there is simply no plan of action of what the new BOJ may do. Even if there were a plan, the idea that long-term stimulus and policies will bring larger benefits if implemented 3 weeks earlier as opposed to later is laughable. The difference effect will be marginal at best, certainly not worth a 2% hike in Nikkei 225.
That being said, the market does what the market wish. As such, arguing with crazy is certainly not advisable when they appear to be in the masses. The trend of both Japanese stocks and USD/JPY is definitely up, with both assets pushing new highs following the news.
Nikkei 225 Futures Daily Chart
We are potentially looking at an acceleration of bullish momentum with the latest rally. Support around 11,000 has been confirmed with price failing to test it substantially following the worst day of 2013 for US stocks (see – 4th Feb 2013). Where can we go from here? The ability to maintain the higher level of bullish momentum is highly suspect, yet we cannot simply denounce the uptrend. Upward trendline from 1st Jan 2013 could still provide support against any short-term pullback which will also represent a lower gear for bullish momentum.
USD/JPY Daily Chart
Yen on the other hand is still maintaining the same momentum, with price breaking 92.0 and 93.0 in 1 smooth swoop. We’re currently testing 94.0 which could still provide some resistance. Rising trendline will provide some support, though a break below may not necessarily open up a bearish reversal as price could still find support around 90.0.
This development is a very strong proof that traders dealing in both Yen and Japanese assets are still riding on promises of future stimulus. We’re looking at the same relationship US stocks had with regards to promise of QE3 for most part of 2012. Even when there aren’t evidence that stimulus is coming, traders will still be buying assets in the hope that BOJ will bail them out. In such a climate, bears must certainly be wary of any pullbacks as they could simply be profit taking from bulls – aka bear traps.