The Nikkei index has been on a sharp upward path from the lows of April and is at risk of a correction.
JPN225 – Daily Chart
The price of JPN225 has flashed a small red candle at the peak, which hints of a potential turn. The 44,032 and 42,091 levels would be the first targets.
Japan’s benchmark index has gained almost 50% from its April lows, and a correction is likely around the corner. Fibonacci targets show that this could go as low as 38,000 and still be healthy in the bullish uptrend from April.
Like Chinese shares, Japan’s top index is seeing gains in tech stocks, which are also being fueled by expectations for a Federal Reserve easing cycle, which is set to start this week.
Japanese shares took a long time to reclaim their 1990 high, only breaching that level last year. Many analysts are now seeing the trend as only going higher, which can often be a time to exercise caution.
Evercore strategist Julian Emanuel said that the Nikkei’s gain is “suggesting a durable upswing”.
Japan’s economy is growing and will continue to expand, according to analysts, who expect gross domestic product to continue to grow by just under 1% annually for the next two years. Tariff fears rattled the market but failed to dampen the projections, with only 4% of the economy coming from exports. Japan has also resolved its inflation problem after nearly two years of zero inflation. The economy now operates at around 2% annual growth.
The government has also made changes to corporate regulations, with companies being urged to increase dividends and commit to stock buybacks. The latter increases earnings per share by reducing the number of shares available.
There is a change in the making with the recent resignation of Prime Minister Shigeru Ishiba. His party suffered a humiliating defeat in a summer election, and that makes monetary policy less clear.
Analysts believe that “expanded fiscal policy” will be inevitable regardless of who is elected. Sanae Takaichi, former Minister of Economic Security, was the leading candidate and he favours an aggressive fiscal and monetary easing policy. That could lower bond yields and keep a bid under stocks, but the short-term has a risk of a pullback.
