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Watch The Nikkei For Signs Of Inflation

By Market OverviewMay 03, 2013 05:38PM GMT Add a Comment
 
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Everyone knows that asset prices are being supported by central-bank money printing called quantitative easing. Central banks such as the Federal Reserve (FRB), Bank of England (BoE) and, now, the Bank of Japan (BoJ) are printing money at unprecedented levels. When a country can buy its own debt from money created out of thin air, that money will then go into stocks and inflate the equity markets.

The Nikkei 225 (Japan) has been surging higher since the country started to devalue its currency. The Japanese Yen has plummeted against the U.S. Dollar, which boosted asset prices in Japan. Leading Japanese ADR's such as Toyota Motor Corp. (ADR) (TM) and Honda Motor Co. Ltd. ADR (HMC) are now trading at new 52-week highs thanks to the central bank's action.

Watch For Inflation
A weak currency will help boost exports for Japan as its products become cheaper for countries with a strong currency. The downside, of course, to such wholesale money printing is inflation, which at this time, central banks around the world say there is very little of. The cure for inflation -- when it does come -- will be to stop the printing presses and raise interest rates. Unfortunately, history has shown that most central banks around the world will create a massive bubble before they start to wean us from their easy-money policies. We shall see if it's different this time.

The Nikkei, Too
The Bank of Japan has stated that it will implement monthly bond purchases in the amount of 7.5 trillion yen ($78 billion) per month in an attempt to boost inflation to two percent within the next two years. Currently, the United States is buying $85 billion worth of bonds every month. It's important to note that Japan's economy is one third the size of the United States. So it is safe to say, Japan's printing presses are in high gear for the time being. Traders and investors should watch the Nikkei 225 Index for near-term chart resistance, around the 14,000 level. There will also be important chart resistance around the 15,000 and 15,470 levels should the index trade higher.

The Nikkei And Resistance Levels
The Nikkei And Resistance Levels

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