Vice Finance Minister Shunichi Yamaguchi told reporters that the central bank is responding as needed. BOJ Governor Haruhiko Kuroda said yesterday the BOJ will adjust the central bank's stimulus program as needed. He said that he wasn't expecting yields to jump a lot and that volatility in the bond market wasn't affecting Japan's economy yet.

The BOJ's injection of 2 trillion yen at all offices today was done in response to excessive volatility in long-term yields, according to an official who asked not to be named due to the central bank's policy.

Eoin Treacy's view At The Chart Seminar we characterise ranges as explosions waiting to happen. As a range persists, those who are waiting to participate on both sides of the market grow impatient and expectations deteriorate. An increasing number of those who wish to sell drop their offers into the range and those wishing to buy move their bids up into the range. This decision making process eventually creates vacuums of supply above and demand below the market. This situation is particularly relevant when a range has persisted for a lengthy period such as in a base formation. Once a breakout occurs, a rally that exceeds expectations of occurs as prices surge into a vacuum. This is what momentum traders who buy breakouts are waiting for. So how does this relate to Japan?

The Nikkei-225 ranged mostly with a downward bias between 2009 and late 2012. Spurred by a state-sponsored devaluation of the Yen, it broke successfully above the psychological 10,000 area in the last week of December and surged to become the best performing major stock market in the world. At The Chart Seminar two weeks ago, a delegate from one of the bulge bracket investment banks mentioned that “everyone is in Japan” and suggested that most of what his trading desk had been doing this year was selling currency hedged Japanese exposure. Having almost doubled in less than a year, the Nikkei had developed a short-term overbought condition and encountered resistance today in the region of 16,000, forming a large downside key day reversal. This is the largest reaction in more than a year and suggests a peak of at least near-term significance.

The breakout from the lengthy base formation was so powerful that the Index has ample room to consolidate above it. Today's large pullback suggests a process of mean reversion is underway. The USD/JPY spot rate has not pulled back to the same extent as the stock market and this can be viewed as positive. It will need to hold above ¥97.50 if the medium-term pattern of Yen weakness is to remain consistent. One relevant point is that while the Fed is considering a less aggressive quantitative easing, the Bank of Japan remains in the early stages of easing policy. Japan's program is larger than the Fed's when compared to the size of the respective economies and is likely to outlast the Fed's.

The Topix Banks Index / Topix ratio fell to break its progression of higher reaction lows on the 10th and extended the relative decline today. Since the banking sector was among the leaders on the breakout and peaked ahead of the wider market, it is also likely to be a lead indicator when this corrective phase has run its course. The Topix Real Estate Index / Topix ratio has a similar pattern.

10-year JGB yields tested the psychological 1% level today before the BoJ's intervention. However, despite government purchases, a sustained move below 0.70% would be required to question medium-term scope for further yield expansion.

Considering the commitment of the Japanese administration to the reform agenda, the medium-term outlook for Japan's stock market is still positive, not least because of its emphatic base formation completion. However, the short-term outlook is for a consolidation of this year's powerful gains to date. The Index will need to hold the breakout during this process to confirm the medium-term bullish outlook.