Japan as the world's third largest economy has been stagnant for over two decades. Prime Minister Shinzo Abe has been working on a plan to end 15 years of deflation
and stimulate growth in Japan. Similar to the U.S., the country's central bank or otherwise known as the the Bank of Japan launched a huge bond buying program. One that is comparable to that of almost double of the U.S. at $78.6B per month versus the U.S. of $45B.
The idea behind quantitative easing is that the government will print money and then buy bonds or other financial assets from banks. This results is that banks will be better capitalized and therefore be able to make loans to finance projects, which in turn would put people to work and stimulate the economy. However, this depends on the banks loaning out their money as they are not obligated to do so. In addition, the drawback of printing more money is you devalue the currency, which can lead to higher prices. Furthermore, the less valuable your currency is the less you will be able to buy of foreign products.
It is yet to be seen if this is a long term solution or is a viable one. However, at the moment the result of QE is an increase in equity prices. In the U.S. and Japan, we have seen slight economic recoveries
, but it is still not at the levels in which the governments believe are self-sustaining. As a result, governments continue to print money to buy bonds.
As always, we will look at the situation from a technical perspective. From a technical perspective, Wisdom Tree Japan Hedged Equity (DXJ) has just broken out of its ascending triangle pattern, which is a bullish sign. However, this fund is extremely volatile and susceptible to overnight gap up or gap downs based on activity from overseas.
The three tests of the bottom range of the channel could have been good buying opportunities. However, if you missed those opportunities, the breakout of the channel is another opportunity. At the moment there is no heavy resistance until the peak in late May, which is just above $53.
This could turn out to be another Facebook earnings gap up and run
or Google type of move
if it decides to continue higher. But, as always remember to manage your risk
and honor your trading plan
Disclaimer: This article is written for informational purposes only and isn't intended as investment advice.
Disclosure: I do not have a position in DXJ, but may initiate one in the next day or two.