Last night, Japan fired another shot in the currency wars choosing to double the scale of its lending programs to banks and thus stimulate loans and support the economy. It's locked in a struggle to boost exports and create inflation, and hopes to remove the veil created by three decades of stagnation.
The result of yet another extraordinary and massively scaled experiment is that trillions of yen are created/borrowed and forced into the financial arena with the hopes of forcing/encouraging borrowing. The belief is that economic activity will benefit and all will be better off as a result. Looking back on the last 30 years in Japan, was low or slightly negative inflation all that bad for its citizens? Did they suffer from that economic reality any more than the rest of the world? Most everyone else really didn't fare any better, given the massive booms and busts around the globe during that period.
Creating inflation, however, is the sole objective of the central bankers. It is to be created no matter what, independent of the costs. It is needed in order to get out of the liquidity trap that has snared most of the world. With debt piled sky-high, what's a little more debt in order to solve the debt problem? Confused? So are the central bankers.
As for finding a way to benefit from the insanity, short term the Japanese stock market should outperform again as the relative value of its currency is shaken lower. The WisdomTree Japan Hedged Equity (NYSEARCA:DXJ) represents a currency-neutral way to trade that market. A retest of the three swing-point lows looks likely on a short-term basis.
On a slightly longer-term time frame (the weekly chart), there are three equidistant ranges. DXJ traded into the lower of the three ranges a week ago in an attempt to break lower but failed to stay there as sellers withdrew and buyers stepped in.
Given that the market determines trend through the testing process, the usual expectation is that if an index can't break down, it is likely to test the other side of the equation. That is probably what we should expect to see on this time frame.
As countries continually jockey to improve their competitive position through currency devaluations, opportunities ebb and flow. The opportunity now is to see the DXJ rise as the rest of the world takes a break.
Editor's note: L.A. Little is a professional trader, author, and money manager who has written several books and contributed material to many financial sites in addition to authoring his own: Technical Analysis Today. He brings a unique perspective to technical analysis, incorporating his extensive engineering and modeling skills when analyzing the markets.