Japanese stocks have staged a strong comeback after tumbling hard earlier this month. The Nikkei 225 index rose to a high of ¥36,240 on Wednesday as traders waited for Thursday’s Japan GDP data. It has risen by over 16% from its lowest point last week. 

Japanese yen has retreated

The Nikkei 225 index comeback happened as the country’s currency, the yen, retreated against the US dollar, Australian dollar, euro, sterling, and other currencies. The USD/JPY exchange rate rose to 146.88, up by over 3.6% from its lowest point this month.

Similarly, the AUD/JPY pair jumped to 98 from last week’s low of 90.2 while the GBP/JPY pair moved to 188.78. 

Japanese stocks do well in a weaker yen environment because most companies in the country mostly deal with exports. This includes motoring giants like Honda, Toyota, and Subaru. A weaker yen also makes these stocks more affordable to foreign investors, including Warren Buffett, who has invested in five trading houses. 

For example, the Nikkei 225 and Topix indices soared to a multi-decade high earlier this year as the Japanese yen fell to 161.5 against the US dollar, its lowest point since the 1980s.

The main catalyst for the recent Nikkei 225 sell-off was the unwinding of the Japanese yen carry trade, which has existed for decades. In this, investors borrowed heavily to invest in both local and international companies. 

Japan had negative interest rates for a long time until it exited them earlier this year. When rates were in the negative zone, it was common for people to borrow cheaply and then invest in the stock market. If everything went perfectly, the stock market return was enough to pay for the small interest.

The weaker Japanese yen also made it an attractive country to tourists. Recent data shows that the country attracted over 17 million visitors in the first half of the year, a record.

Now, the Japanese central bank has started hiking interest rates. Earlier this month, it caught the market by surprise as it hiked interest rates by 0.25%, its biggest increase in decades. Officials have also warned that more hikes may be coming. 

Japan GDP data ahead

The next important Nikkei 225 news will be the upcoming Japan GDP data, which will come out on Thursday. Economists polled by Reuters expect the preliminary report to reveal that the economy expanded by 2.1% in Q2 after retreating by 1.8% in the previous quarter. 

The QoQ GDP figure is expected to come in at 0.6%, a big increase from the 0.5% contraction it made in Q1. This recovery will be because of a 0.5% increase in private consumption and a 0.9% increase in capital expenditure. It will be offset by a 0.1% decline in external demand. 

If the economic numbers are this strong, they will increase the chance of another BoJ interest rate hike in the next meeting on September 20th. 

US inflation data ahead

The next important Nikkei 225 news will be the upcoming US inflation report, on Wednesday. Economists expect the data to show that the headline and core inflation rose slightly in July. 

Precisely, the headline Consumer Price Index (CPI) is expected to come in at 3% while the core CPI eased slightly from 3.3% to 3.2%. Still, there are chances that the figures will come out lower than expected. Just on Tuesday, the latest Producer Price Index (PPI) retreated to 2.2% and 2.4%, respectively.

US inflation numbers are important to global stocks because they mean that the Federal Reserve may start cutting interest rates as soon as in September. This explains why the Dow Jones and the Nasdaq 100 indices rose by 408 and 407 points on Tuesday.

Many Japanese companies have bounced back in the past few days. Fujikura stock has risen by 31% in the past five days while Sapporo Holdings, Trend Micro, Resonac Holdings, and Mitsui Mining have risen by over 10%. 

On the other hand, the top laggards in the Nikkei 225 index were SUMCO, Shiseido, and Meiji Holdings.

Nikkei 225 index forecast

Nikkei 225 chart by TradingView

The weekly chart shows that the Nikkei 225 index peaked at ¥42,435 in July and then suffered a harsh reversal and reached a low of ¥31,163 on Monday last week. 

The index has then bounced back and moved to ¥36,273. It formed what looks like a dragonfly doji or a hammer pattern, which is characterised by a long lower shadow. In most cases, this pattern leads to more upside, a move that has been confirmed by the fact that it has formed a bullish candle this week.

The Nikkei 225 index is approaching the key resistance point at ¥36,772, its lowest point in April, and the neckline of the double top pattern at ¥41,000. Therefore, the index will likely continue rising as buyers target the key resistance point at ¥38,000.

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