Nikkei surges as BoJ unexpectedly expands QE

One central bank ends QE, another increases it. This is not a trick but a treat for the markets. The global equity markets have surged higher after the Bank of Japan surprised the markets overnight by expanding its monetary easing programme to about 80 trillion yen a year, up from Y60tn-Y70tn previously. The BoJ will achieve this mainly by increasing its purchases of longer-term Japanese government bonds. The central bank is clearly worried about the impact of the April sales tax hike, the recent fall back in inflation and lower global oil prices. Indeed, the BoJ governor Haruhiko Kuroda himself thinks that the economy is at “a critical moment,” pointing out “there was a risk that despite having made steady progress, we could face a delay in eradicating the public’s deflation mindset.” That’s why they increased QE.

At the close of play on Friday, the Nikkei had already increased 4.8% to 16413. But in the index future has since gained further and at the time of writing it is hovering around 16760, representing a gain in excess of 2% from the official close. If the index future settles around the current levels, or better still, increase further during the New York session, then Monday could be another cheerful day for Japanese stocks.

The last time I covered the Nikkei index was at the end of September, when the index had just reached the previous 2014 high around 16375 but was struggling to hold above it. That led me to believe that a correction was imminent, which as it turned out was in fact the case. But like all the other major indices, the Nikkei has since bounced back very strongly and today it has decisively taken out the area around the previous 2014 highs, namely 16375 to 16430. This area is thus likely to turn into support if and when the index falls back. A potential break below this area would be very bearish. But the path of least resistance is clearly to the upside now, so let’s concentrate on finding potential resistance levels. The first such area is not too far off now: 16900-17000. This is where a resistance trend line meets the 127.2% Fibonacci extension level of the last correction. Not only is that, 17000 also a psychological level. Beyond there, 17500 could be the next target followed by the 161.8% Fibonacci extension at 17715.