The wind hadn’t even settled and there were a bunch of people in Tokyo trying to put a lot of extra air under the Nikkei 225 index and the USD/JPY rates.
Nomura is out hard on both the Nikkei and the USD/JPY, with a 2020 speculation of 25 000 for the former and a rally to 120 within one to two years for the latter. Credit Agricole is going full-on Technical and calling the levels of 111.50 on the USD/JPY this week but “long term” 112.63. Rationale as follows:
- 111.50: 50% retracement of 1998 high and modern time low in 2011. I do doubt that this will be significant (it’s pretty archaic and there are a whole host of different resistances on the way down during the late-2000’s clustered around the 110 level) so fibs overall? Nah. Still, the fib levels are due to a major move and probably the major “fib” level of 50%…
- 112.63: 76.43% retracement of 2007 high to 2011 low. Wait say what? Sure, the 2007 “high” marks a fairly concerted move down, but it is not particularly appealing as a level:
- Price action in 2006 up until the peak in 2007 was pretty weak.
- The 2002 peak and its two surrounding shoulders plus the May 1997 high have higher levels of price action, are more consistent and clock in between 126 and 124, but that doesn’t mean that drawing fibs from there is a good idea.
- We’re using smaller moves with less price action and the 5th fib level in the importance rank to reign in moves marked by big price action and the top-ranked “fib”? Oh dear…
Here’s where joining technical analysis with fundamentals is a decent approach. The BOJ will give an announcement tomorrow on the QE experiment, and Kuroda has shown that he doesn’t mind the weaker yen. The analyst expectations for this event are essentially either more easing (roughly a quarter of analysts in this camp) or no change. But what analysis does the BOJ make?
Primarily, I believe that this comes down to what the net effects of the tax hike would be estimated to be. Currently, on a two-quarter quick and dirty analysis it looks like it would had a marginal negative effect on GDP on the order of 0.3% (+6% Q1 vs -7.1% Q1, in annualized QoQ growth rates). I think this is acceptable to shore up public finances and potentially open up the floor for more corporate tax reform (get to it already!) but in Japanese politics I have the feeling that tax hikes preceding growth slumps are anathema to any Japanese politician. Oh, they raised the sales tax in April of 1997 and it snuffed out a recovery? The fact that East Asian capital markets imploded in the summer of 1997 had nothing to do with it? Similarly to tax hikes, as berated as Japanese central bankers have been for tightening in the 1990’s, I really doubt a dove like Kuroda will view more easing at this juncture as a bad thing.
With the recent Tankan survey showing exporter-and-manufacturing positive sentiments but non-manufacturing sectors (which are the larger domestic concern) not being as positive, the Tankan pretty much gives a clear go-ahead to support further easing if CapEx will follow. Added CapEx abroad lowers the yen, and further adds profits to the coffers of the Japanese exporters and Mrs. Watanabes that have parked cash in the Aussie, hopefully allowing for more domestic spending ignited by domestic CapEx (which beyond boosting GDP also gives a great shot in the arm to the velocity of money from using corporate cash reserves!) and getting the virtuous inflationary cycle finally going.
If the BOJ can start this cycle and sets it off tomorrow by even more QE, then that puts the onus on Abe and the LDP to get some proper political reform underway, particularly to take this chance to increase the sales tax and lower corporate tax rates. If the BOJ doesn’t dare do it now, they will likely be forced to do it sometime before Q3 2015 starts. It would also make Nomura chief Nagai-san’s prediction of the Nikkei 225 at 25 000 much more likely to come true.
For the yen, conditional upon added QE (I estimate the probability at 30-50%) I would put the likely level in the coming few weeks between 110 and 115, with a range of 105 to 120 before year-end. In either more QE or status quo scenarios I would expect the yen to at least tag 124.12 during H1 2015 if it holds open and close above 110 for a single week.