NIKKEI225 Sentiment on Rates & Positive Data Keep Rally Alive

The Japanese stock market has recovered almost all of the lost ground after the BoJ hiked rates at the end of July.

Investors have been getting back into stocks as sentiment on interest rate cuts improves. Great expectations on the street for Powells upcoming speech from Jackson Hole. Expect a great deal of volatility if those expectations aren’t met.

For Japan, a stronger yen has also eased fears of further rate hikes. The BoJ hiked rates to defend against rising inflation, which is currently at 2.8%, over the central bank’s target of 2%.

However, given the government officials’ comments about the need to defend the yen, and BoJ FX intervention, it seems more likely the hike came early to prop up a weak yen.

Tomorrow we get inflation data for Japan, with Core Inflation YoY expected to rise slightly from 2.6% to 2.7% last month. For now, the BoJ has stated that there will be no further hikes while the capital markets are unstable.

In any case, a stronger than expected inflation number may startle the market and cause a correction. Overnight we got preliminary PMI data from Japan, which was lower than expected but still higher that last month’s reading.

The initial reaction was subdued; however, the market has stayed positive with the NIKKEI225 currently up 0.64%.

Technical View

The day chart below for the NIKKEI225 shows a bear trend undergoing a major correction. The correction has almost completely retraced all losses after the BoJ meeting (blue arrow). The level also corresponds to a previous resistance level from February (blue line).

I would expect the market to struggle getting past that level without a correction lower first. To the downside, the market finds support at 37,599 (red line), which corresponds to the dip prior to reaching the all-time high.

Should that level break the next major support is at 33,837 (black line), which corresponds to the resistance level created at the end of 2023 that was broken and took the market to repeating highs.