Nikkei 225 and Topix index analysis: time to buy the dip?

The Nikkei 225 index pulled back this week even as Japan had its first big initial public offering and after Kazuo Uoda hinted that the bank would not hike interest rates next week. The index, which tracks the biggest Japanese companies, retreated to ¥37,770, its lowest level since October 2.

Meanwhile, the Topix index retreated to ¥2,610, its lowest level since September 19, and 11.4% below the highest level this year. 

Tokyo Metro IPO

Like in many other countries, initial public offerings have largely died in the past few years in Japan. Therefore, it was a big surprise when Tokyo Metro, the beloved operator of the country’s train company, went public on Wednesday.

The shares surged by over 45% on the first day on the Tokyo Stock Exchange (TSX). This jump was mostly because of retail investors, who love the company for its punctuality and quality of services. It was also because of the robust marketing campaign by the company before the IPO.

Tokyo Metro raised $2.3 billion from investors, making it the biggest IPO since JR Kyushu in 2016. 

Therefore, there is a high likelihood that the listing will incentivise more Japanese companies to go public. Besides, the Nikkei 225 and the Topix indices have proven that there is still demand for Japanese companies. 

The Nikkei 225 index jumped to a multi-decade high of ¥42,415 on July 11, while the Topix soared to ¥2,950. At their peak this year, they were among the best-performing indices globally this year.

Bank of Japan interest rates

The other top catalyst for the Nikkei 225 and Topix indices was the recent statement by Kazuo Ueda, the BoJ governor. In a statement on Thursday in Washington, he said that the central bank will likely leave interest rates unchanged when it completes its meeting next week.

In his opinion, the bank still has time to receive and reflect on more economic data before delivering its next rate hike. His view was notable since some analysts were expecting the bank to hike interest rates now that the Japanese yen has slumped. 

The USD/JPY exchange rate soared to 153.11 this week, its highest point since July 31st, and 9.60% higher than the August low of 139.62. As such, a rate hike would likely be appropriate if the bank wants to support the currency.

Data released on Friday showed that the core Consumer Price Index (CPI) moved from 2.1% in September to 1.8% in October. This decline was a bit lower than the median estimate of 1.7%

Tokyo’s CPI dropped from 2.1% to 1.8%, while the inflation figure that excludes food and energy, moved from 1.2% to 1.1%. 

Global indices retreated

The Nikkei 225 index retreat also coincided with that of other global indices. In the United States, the Dow Jones index dropped for five consecutive days, reaching a low of $41,800, its lowest point since October 9. It has dropped by over 2.15% from its highest point this year. 

Similarly, the S&P 500 index dropped to $5,800, while the Nasdaq 100 fell to $20,300. The same trend happened in Europe, where the DAX 40, CAC 40, and FTSE MIB resumed their downward trend. 

In most periods, Japanese indices like the Nikkei 225 and Topix have a close correlation with their other global peers. 

Many companies in the Nikkei 225 index have done well this year. Mitsubishi Heavy Industries has jumped by 158% this year, helped by the rising demand for power and aircraft parts. 

IHI Corp, another large industrial company, also did well as its energy products jumped. It rose by over 177% this year. Fujikura has jumped by 363%, while Hitachi has more than doubled. 

Other top-performing companies in the Nikkei 225 index were Japan Steel Works, Konami, and Sumitomo Mitsui.

Nikkei 225 index analysis

Nikkei 225 chart by TradingView

The daily chart shows that the Nikkei index has been in a strong downward trend in the past few days. It has dropped from ¥40,240 to a low of ¥37,770, its lowest point since October 2.

The index has dropped by 11% from its highest level this year, meaning that it has moved into a correction. 

Meanwhile, the two lines of the Percentage Price Oscillator (PPO) have made a bearish crossover pattern. Also, the Relative Strength Index (RSI) has dropped below the neutral point at 50. Other oscillators like the Stochastic Oscillator have continued moving downwards. 

Therefore, the index will likely remain on edge as traders wait for next week’s Bank of Japan decision. If this happens, the next point to watch will be at ¥37,000. If this happens, the Topix index will also keep moving downwards, with the next target being at ¥2,500, its lowest point on September 11. 

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