By TraderVox.com
Looks like Valentine’s Day wasn’t only for lovers as the bank of Japan presented the Japanese economy with a present yesterday. Though the Bank of Japan left its interest rates near zero percent yesterday, the central bank shocked the markets by announcing not only an increase in its asset purchases, but also a new inflation outlook.
The Bank of Japan (BOJ)'s first surprise was its decision to adopt a 1.0% target for its CPI. Apparently, the central bank is hoping that adopting the Fed's move of an inflation target would increase confidence amid the country's unclear economic outlook.
Market participants have been worrying about the Japanese economy, especially since the BOJ recently downgraded its economic forecasts from a 0.3% growth to a 0.4% contraction come 2012. Unsurprisingly, the euro zone debt issue and the yen's increased strength ranked high among the central bank's issues.
Until the inflation target is reached though, the BOJ plans will continue to follow through on economic growth through a relatively easing monetary policy. In fact, the BOJ also said yesterday that it would bring in an additional 10 trillion yen into its asset purchasing program, which would boost the size of the program to a total of 65 trillion yen.
From the way the yen pairs reacted, it seems that investors are taking the BOJ seriously. The yen weakened across the board following the announcement, with USD/JPY jumping 34 pips in the first 30 minutes and closed 86 pips above opening price.
QE, even though it is aimed to stimulate the economic growth, is usually considered bad
Why is this?
Quantitative easing is a method for the currency by which a central bank increases cash supply in the economy by printing new money. The newly-printed money is then used to flood the market with capital in an effort to stoke lending and increase the amount of money in circulation. Unfortunately, by virtue of basic supply and demand, a rise in money supply usually erodes the value of each unit of currency, which might lead inflation.
That being said, I believe that the expansion of the BOJ's asset purchase program, together with their currency intervention policy, will continue to put downside pressure on the yen. Technical analysis also supports this, as the USD/JPY daily chart is showing some signs of reversal.
Article provided TraderVox.com
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