BoJ and ECB expected QE policies

ECB meeting, BoJ, monetary policies, quantitative easing, JPY, EUR, analysis, fx trader, forex

The Japanese economy is showing clear signs that it is in a liquidity trap. A liquidity trap is a Keynesian economics scenario when the central bank injects money in the private banking sector but this injection fails to increase growth and consumption. This is due to banks hoarding the cash which has been made by selling government bonds and other securities to the central bank. Hoarding of this cash will result in reduced loans and thus lower investment and consequently lower inflation.

Furthermore, the slump in oil prices, as shown in the graph below, is not helping the Bank of Japan meet its 2% target inflation rate. The BoJ is expected to reduce consumer inflation forecast from 1.7% to 1.5% following its meeting ending on 21st of January. Whilst the declining oil prices might not be good for the BoJ, firms in Japan should welcome this slump because with lower oil prices, overheads should reduce and for the economy as a whole, employment should increase. That being said, the World Bank recently cut the global growth forecast due to the weak outlook for the Eurozone and Asia.

The BoJ is expected to play the waiting game until oil prices begin to stabilise and the global outlook improves.

ECB meeting, BoJ, monetary policies, quantitative easing, JPY, EUR, analysis, fx trader, forex USD Barrel

ECB is likely to implement Quantitative Easing and speculators are placing large bets that this will commence this week. However, as there is already excess liquidity due to the low interest rates, it is unlikely that QE will work. The ECB should really be looking at Japan as an example of a liquidity trap.

German Chancellor, Angela Merkel, has pleaded to the ECB that QE cannot be an excuse for governments to brush structural reforms aside. The ECB has stressed this point frequently to local governments. QE will only be effective if structural reforms take place, which will help boost productivity and increase the velocity of money circulating the economy. If QE is employed then a huge slump in the Euro could be expected, as QE increases the supply of Euro in circulation. German Flash Manufacturing PMI and French Flash Manufacturing PMI are expected to be below forecast due to the current state of the Eurozone.

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