With the global trading community focused on monetary policy and the weekly cadence now seeming to present a different central bank taking the spotlight each week, it seems fitting that in the second half of this week the turn will belong to the Bank of Japan (BOJ). The BOJ will reveal a fresh slate of new data, culminating in a rate decision and remarks from Governor Kuroda at 6:30 GMT on Thursday. And while several central banks have pursued a more hawkish tilt lately, the BOJ may present a contrast as the BOJ is widely expected to continue to entertain a pronounced dovish posture with no changes to their current policy and no real need to provide any guidance on when a lean towards tightening could be expected.
And while the impact on the Yen of the monetary policy is widely discussed, we are feeling a shift in the dialogue towards a focus on growth. Japanese equity markets have continued higher on, and while as recently as a few months ago the Nikkei 225 was approaching all-time highs only to mildly retrace, the index has continued to roll higher, albeit with a middling sideways chop that has allowed the index to drift into a pronounced range.
Momentum has allowed the Index to ascend and enjoy time in the upper bounds of that range, but it is still mildly fluttering in a tight range nonetheless, and consolidating at current levels over the past month. The Relative Strength Indicator has trended through the 50’s consistently and the Index has been lacking any meaningful sharp moves or any undercurrent of volatility.
For binary traders, there is the potential for effectively a mixed bag from the Bank of Japan this week. To many observers the inflation expectations advanced by the BOJ to date have been out of reach and the timeline has been unrealistic. The expectation for lower inflation than the targets provided by BOJ seems to be the baseline assumption and priced in by the markets. If BOJ must revise inflation expectations downward this week, there is the potential for that to in essence be meeting the markets expectations that are already priced in.
Under this scenario, the conversation around current and forward growth would be key. Last week, the Bank of Japan, in its quarterly economic report, raised growth forecasts for 5 out of 9 regions and held the other four steady. It also said six of the regional economies are expanding moderately or moving towards moderate expansion. This seems to indicate the potential for a two-part conclusion as we move through this week. The BOJ would be forced to remain on its current dramatic easing agenda to boost inflation, while at the same time guiding for moderately higher growth than previously forecast. Both assessments would be net positive for equity markets and the Nikkei 225.
As a result of these factors, directionally we feel a bias for a continued drift higher this week in the Nikkei 225.
Meaningful support is in at 20,200, and a breakthrough of that would allow the Nikkei 225 to set its sights on the all- time highs at 21,000. The 20,2000 level this week is a stretch, but if the Index begins to approach that level late in the week, the speculation around approaching 21,000 could fuel additional momentum and provide a lift for the Nikkei as it seeks exit velocity from its current range.