NIKKEI225: BoJ Governor Reiterates Further Rate Hikes Depend on Market Conditions

Governor Kazuo Ueda was called for a parliamentary hearing concerning the BoJ’s rate hike at the end of July.

Ueda told parliament that the BoJ was on course to raise interest rates even if inflation remained stable. Stating that interest rates were too low and would have to rise to levels the central bank considered normal.

A comment like that should have spooked the markets and created a sharp reaction. However, the governor of the BoJ also added that financial markets were nervous at home and abroad. Concluding that the scenario might change the central bank’s view on inflation.

This last comment signals that the BoJ will continue to take into account the state of the capital markets. Something Ueda’s deputy promptly reassured the markets about after the last rate hike and following selloff.

Ueda reassured parliament that interest rates were still accommodative and that the BoJ would continue its normalization policy. Their stance will not change as long as the economy can move toward 2% stable inflation.

Overnight inflation data showed a small increase in Core Inflation YoY from 2.6% to 2.7%. While Inflation excluding food and energy declined to 1.9% from 2.2%. Current data shows inflation is in fact stabilizing around 2%.

However, Ueda’s words would lead to believe there is uncertainty over the schedule the BoJ will follow to normalize rates. Normalization might take longer than expected, and I believe will depend also on how volatile the yen is.

Technical View

The day chart above for the NIKKEI225 shows a bear trend undergoing a major correction. The market has almost completely recovered all the lost ground from the selloff at the end of July (blue arrow).

The next candles will tell us where the market is likely headed next. The market will find resistance at 38,864 (blue line), which corresponds to a level created in February. And is also the level from which the selloff started.

I would be surprised to see the market trend higher without any pause and correction once it reaches the resistance level. The RSI is still hovering around 56, which shows the momentum of this last bullish leg is low.

For now, the outlook is bearish as the market still remains well below the Ichimoku cloud.