The Nikkei 225 index has remained in a consolidation phase in the past few months, underperforming most global indices like the German DAX, FTSE 100, and Nasdaq 100 indices that have surged to their record highs.
The index, which tracks the biggest Japanese companies, was trading at ¥39,000, a few points below the year-to-date high of ¥40,380. So, let’s explore why the Nikkei index has wavered and what to expect.
Bank of Japan rate hikes
The main reason why the Nikkei 225 index has wavered this year is the fact that the Bank of Japan (BoJ) has embarked on a highly hawkish tone.
It has hiked interest rates by 0.25% this year and pointed to more rate cuts in the coming months.
Odds of higher rate hikes have increased after Japan published strong GDP data this week. The economy expanded from 0.4% in Q3’24 to 0.7% in Q4’24, higher than the median estimate of 0.3%.
This economic growth translated to an annualized growth rate of 2.8%, higher than the median estimate of 1.0%. It was much higher than the 1.7% growth in the third quarter of last year.
Japan’s GDP growth has been helped by a surge in private consumption, which rose by 0.2% in Q4, also higher than the expected drop of 0.3%. Consumer spending has grown because of the country’s ongoing wage growth. External demand and government spending are also resilient.
Japan’s inflation has also surged in the past few months, a notable performance for a country that existed for decades without inflation. The headline consumer price index rose to 3.6% in December, much higher than the previous 2.9%.
Japan yen and yields surge
Therefore, the BoJ has hinted that it may hike rates further this year, leading to a stronger Japanese yen. The USD/JPY exchange rate has dropped to 152 from the year-to-date high of 158.81.
Similarly, the yield of government bonds has soared in the past few months. The ten-year government bond yield jumped to 1.45% from last year’s low of 1.43%. That yield remained in the negative zone a few years ago.
The 5-year and 30-year Japan Government Bond (JGB) yields have also climbed to their multi-year highs this year. This trend may continue as the BoJ maintains a hawkish tone.
The Nikkei 225 index often does well when the Japanese yen is cooling because many companies in the index are exporters. This includes automakers like Toyota and Honda.
At the same time, higher bond yields have led to a sector rotation from equities to fixed income assets.
Many large Japanese companies have surged this year. Nintendo stock price has soared in the last five straight weeks as demand for its gaming consoles jump. It has risen by over 44% in the last 12 months and moved to a record high.
Softbank, the telecom and technology giant, has also soared to a record high as it boosts its investments in the artificial intelligence industry. Other notable top-performing Nikkei 225 index companies are Fast Retailing, Sony, and Hitachi.
Nikkei 225 index analysis
Nikkei chart by TradingView
The daily chart shows that the Nikkei 225 index has moved sideways in the past few months. It has remained inside the key channel at ¥38,000 and ¥40,380 since September last year.
This consolidation happened after the index jumped sharply a few months earlier. That is a sign that it has formed a bullish flag pattern, a popular continuation sign.
Therefore, the Nikkei 225 index will likely have a strong bullish breakout in the coming months. Such a move will see it rise to the next key resistance level at ¥40,380, followed by last year’s high of ¥42,395.
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