When QE is implemented or expanded, we think the scale of the action is a measure not so much of the degree of monetary easing as of the extent of financial paralysis. The impact of monetary easing can be understood as the extent to which people make use of the ready availability of a large volume of low-cost money. QE has been implemented in abnormal conditions when balance sheet adjustments have stalled, policy rates have been lowered to zero, and money is not circulating. In this sense, we can interpret the US's QE2 of only $600bn, compared with the conjectured $1.5trn, as the result of the initial action coming fairly close to delivering the impact of monetary easing.

Let's return to Japan between 2001 and 2004. At the time, conditions in Japan were close to a liquidity trap in a deflationary environment, pressuring the BoJ to conduct QE. As Japan is a creditor nation, reduced risk tolerance and strengthened investors' “home bias” resulted in yen appreciation. No matter how much monetary easing the BoJ conducts, yen appreciation does not lead to growth in yen borrowing overseas. Japan's QE thus did not deliver a monetary easing impact, and the vicious cycle of yen appreciation and deflationary effects persisted.

In contrast, when conditions in the US left its authorities no option but to conduct QE, the dollar depreciated as the inflow of funds into this debtor nation stalled. As a key currency, the dollar is in wide use globally. Even if financial paralysis continues in the US, high-growth nations such as emerging economies move to make increasing use of readily available dollar funds. This sentiment favoring a weaker dollar is reinforced by carry trades. If QE in the US leads to dollar depreciation, monetary conditions in the nation will ease even after interest rates are lowered as far as possible, and a reflex impact overseas benefits US exports as well. The US authorities appear to want to break free of balance sheet adjustments in 3-5 years, compared with the more than 15 years taken in Japan.

Eoin Treacy's view Today's announcement of an asset purchase plan and 1% inflation target by the Bank of Japan would appear to be a case of peer pressure. Under Ben Bernanke, the Fed has adopted a similar measure and the ECB was founded on a price stability mandate. Against a background of slowing growth, a strong currency and exodus by manufacturers, the BoJ has little choice but to follow other large economies in quantitative easing. This article from Bloomberg carries some additional information.

Over the last year, the BoJ has intervened to weaken the currency on a number of occasions but its efforts have been half hearted at best. It remains to be seen what effect they might have if they embark on a medium-term to weaken the currency and support growth. The BoJ has been defending the ¥76 area against the US Dollar since last year. The rate rallied from that area again at the beginning of the month and is now testing the upper side of the developing base near ¥78. A sustained move above ¥78 would be required to confirm more than temporary Yen weakness.

The Euro continues to rebound against the Yen, having found at least near-term support in the region of ¥100. It will need to sustain a move above ¥105 to question the consistency of the almost yearlong downtrend.

The Australian Dollar, with a 4.15% interest rate differential over the Yen, is rallying from the lower side of the two-year range. A sustained move below ¥80 would be required to question medium-term scope for continued higher to lateral ranging.

The stock market responded positively to the BOJ's intervention with the banks sector in particular rallying impressively. A sustained move below 110 would now be required to question potential for some additional upside. The Nikkei-225 has broken back above the 200-day MA as it continues to extend its rally from the 8000 area. A clear downward dynamic would be required to check potential for additional upside.