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What if the Bank of Japan disappoints?

What if the Bank of Japan disappoints?

The Bank of Japan is a live chance of adding to its quantitative easing program tomorrow. It's most obvious choices appear to be either doing nothing or going for a shock and awe alternative. This means tomorrow could see some big moves in both Yen pairs and the Japan 225 stock index.


BOJ choices


Analysts are equally divided on whether BOJ will add to its stimulus tomorrow. The argument in favor of doing something is that neither economic growth or inflation are anywhere near target. Bloomberg 2015 consensus forecasts are for core CPI to be up by only 0.5%. Real GDP growth is forecast to be a tepid 0.8%.

The argument for doing something big is that this could well be the last shot in the BOJ's locker. It's best chance of doing something that makes a real difference to economic activity might be a radical stimulus program that seeks to provide a real confidence shock to the economy.

The argument for doing nothing is that the BOJ is trying to push water up a hill. Monetary stimulus has made some positive difference so far but there's only so much it can do. In the absence of reforms to allow immigration or further free up the labor market, there's not too much more the BOJ can do to help. Indeed it may do more harm than good creating imbalances in the economy and pushing up asset prices without any benefit to the underlying economy. There's also mounting political pressure with voters feeling the impact of rising prices for imported goods while incomes remain flat.

The prospect of the Fed beginning to lift rates might also make it easier for the BOJ not to act. The Fed might have an opportunity to show a bit of leadership here, helping other central banks to wean off providing ever more stimulus. Low inflation is partly about excess capacity around the world. Central banks can only help with this, not cure it completely. Whilst not explicitly stated this might be part of the reason the Fed is thinking about tightening even though inflation still below their target. They can get started without doing much harm and reduce the risk of having to act suddenly once inflation does start to rise. The key will be doing so without putting too much upward pressure on $US.


Market reactions


The possibility of either a big BOJ package or no move at all could create some scope for large market adjustments tomorrow.

It's not always easy to get on the right side of these. Markets can gap immediately after the announcement. One approach is to look for support and resistance levels and to place stop entry orders well on the other side of them. This cuts down the risk of whipsaw losses on false breaks

Boundaries can be an invaluable feature for this sort of break out strategy. You can find these on the CMC order ticket. They allow you to set a limit on the stop entry order. This means you can place a stop entry order without the risk of being caught by a gap move that's too big. . If the market gaps past your boundary limit, you don't get filled. This means you don't open a trade that's too close to your profit objective and too far from you stop loss level.


Japan 225 chart


As things currently stand the index is currently setting up for a possible double top or triple top situation. If the BOJ disappoints there could be an opportunity to get set on a stop entry sell below the double top support. The other possibility might be a false rally to the resistance, if say the stimulus is only small, and a possible opportunity to sell a third rejection of the upper horizontal line.

USDJPY CFD 4 hour Click to Enlarge USDJPY CFD 4 hour
Click to Enlarge


USDJPY chart


Dollar yen has a similar look. Here the potential significance of the support is enhanced by past resistance and the 200 period moving average on the 4 hour chart. If BOJ disappoints, the Yen could be bought i.e USDJPY could fall. In this strategy, the stop entry sell with boundary would be placed clear of the support



Set Ups often don't trigger


Of course if BOJ comes out with the 'bazooka" then the Japan 225 will be bought, the Yen will be sold and these "BOJ disappointment strategies" would just be another couple of setups that don't get triggered.

Another thing to be prepared for is that the set ups could be either triggered or negated before the BOJ decision. There's quite a bit of economic data out from Japan tomorrow including inflation data. In these circumstances it would also be a matter of going back to the drawing board and acting according to what (if anything) the charts show at the time. This process of identifying possible setups with only some providing trades is of course the day to day routine of  trading strategies




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