Nikkei 225 and Topix outlook as the USD/JPY retests 145

Nikkei 225 index rally accelerated this week as investors cheered the depreciating Japanese yen and the latest stimulus package by the Chinese government. The index, which tracks the biggest Japanese companies, rose to ¥38,736 on Thursday, its highest point since September 3rd. It has soared by over 24% from its lowest level in August.

The Topix index, on the other hand, has risen to ¥2,700, also 22% higher than its lowest point in August. 

Japanese yen crash

One of the main reasons why the Topix and the Nikkei 225 indices have jumped is that the Japanese yen (JPY) has continued its downtrend. The USD/JPY exchange rate has risen from this month’s low of 139 to 144, its lowest point in three weeks.

The pair has reacted to the last Federal Reserve and Bank of Japan (BoJ) interest rate decisions. In its meeting last week, the Fed delivered a jumbo rate cut and expressed concerns about the deteriorating labor market as the unemployment rate rose to over 4%. 

Most Fed officials who have talked this week, including Raphael Bostic and Neel Kashkari, noted that the bank would continue cutting rates.

The case for more Fed cuts was made after data by the Conference Board and S&P Global showed that the economy was softening. The consumer confidence figure dropped at the fastest pace in three years while the manufacturing PMI remained below 45. US and global stocks tend to do well when the Fed has embraced a dovish tone. 

Meanwhile, in Japan, the central bank left interest rates unchanged at 0.25%, as some analysts had expected. At the same time, Governor Kazuo Uoda has hinted that the bank was not in a hurry to restart rate hikes. As such, there is a general view that the BoJ may be done hiking for now. In a note, Mizuho Securities said:

“The dollar/yen is likely to continue to fluctuate, with market expectations for the size of the interest rate cut at the next FOMC meeting in November changing in response to the strength or weakness of US economic indicators.”

Many Japanese companies do well when the local currency is falling because they mostly focus on exports. This includes well-known brands like Toyota, Honda, Nissan, Sony, and Mitsubishi Heavy.

However, there are signs that this dynamic is changing now that Japan has moved into having large trade deficits. The most recent data shows that Japan has had an annual deficit for three consecutive years.

China stimulus package

The Nikkei 225 and the Topix indices have also soared because of the recently announced stimulus package by Beijing.

The People Bank of China (PBoC) announced measures that will see local banks unlock over $125 billion in lending.

Other policies also aim to boost the troubled real estate sector and China’s stock market. This explains why most Chinese and Asian indices have rebounded this week.

The China A50 index has soared by over 12% from its lowest point this month. Similarly, the Hang Seng index jumped to H$19,690, its highest level since August 2023. It has risen by over 32% from its lowest point this year. 

Other Asian indices in Indonesia, South Korea, and the Philippines have also surged this week.

This week’s ruling party elections will be the next key catalyst for the Nikkei 225 and Topix indices. In most periods, the winner in this election will likely become the next prime minister. 

Some of the best-performing companies in the index this week are Mitsubishi Heavy Industries, Kawasaki Heavy Industries, Fujikura, Ebara, Shiseido, Tokyo Electron, Resonac Holdings, and Japan Steel Works. All these companies have surged by over 10%.

Nikkei 225 index analysis

Nikkei index chart by TradingView

The weekly chart shows that the Nikkei 225 index soared to a multi-decade high of ¥42,401 earlier this year.

It then suffered a harsh reversal in August as the Japanese yen carry trade unwinding happened. This retreat reached a low of ¥31,172, its lowest point since October 2023.

The index then formed a small hammer candlestick pattern, which is often a sign of a bullish reversal. 

It has now risen above the 50-week exponential moving average (EMA) and the 23.6% Fibonacci retracement point. The index has risen for three consecutive weeks and has moved above the neutral line of the Andrew’s pitchfork tool.

The Relative Strength Index (RSI) has moved slightly above the neutral level of 50 while the MACD is facing downwards. 

Therefore, the Nikkei index will likely continue rising as bulls target the next resistance level at ¥40,000. The alternative scenario is where the rally takes a breather and retests the support at ¥36,250, the 23.6% retracement point.

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