The Nikkei 225 index has risen modestly in the past few days as investors have moved back to the stock market. It initially bottomed at ¥35,960 last week, and has rebounded to over ¥38,000. This article explores why the Nikkei index is rising and what to expect ahead of the Fed and BoJ interest rate decisions.
Warren Buffett buys more Japan stocks
One of the top reasons why the Nikkei 225 index has risen is that Warren Buffett has remained bullish on Japan stocks.
He has done that by being one of the biggest investors in the five trading houses that dominate the Japanese economy.
These companies are Marubeni, Itochu, Mitsubishi, Mitsui, and Sumitomo. He initially invested in these companies during the pandemic and has grown to become their biggest investor.
Warren Buffett believes that these trading houses are highly undervalued and that their business will continue doing well in the longer term. This explains why he recently bought more of these companies even as he dumped some of US companies like Apple and Bank of America.
Bank of Japan interest rate decision ahead
The Nikkei 225 index will be the upcoming BoJ interest rate decision that will happen on Wednesday.
Economists expect the bank to leave interest rates unchanged as it observes the impacts of Donald Trump’s tariffs on the US.
However, there are signs that the BoJ will embrace a more hawkish tone now that inflation has jumped to 4% in the past few months.
Indeed, the bond market point to further rate hikes in the future. The 10-year yield of Japanese bonds has jumped to 1.5%, higher than last year’s low of 0.728%. Similarly, the 30-year and 5-year yields have soared in the past few months.
Rising bond yields is a sign that investors anticipate that the BoJ will deliver more hikes in the future as it combats rising inflation.
The Nikkei 225 index normally falls when the Japanese yen is falling because it pushes more investors from stocks to bonds.
FOMC decision ahead
The other key catalyst for the Nikkei 225 index will be the Federal Reserve interest rate decision scheduled on Wednesday this week.
The bank is not expected to cut or hike interest rates this week. Nonetheless, officials will likely mention the tariff risk and explain what to expect later this year. Analysts anticipate more rate cuts later this year as US recession odds rise.
A hawkish Fed will likely be a bad thing for the Nikkei 225 and other global stocks. Historically, these indices thrive when the Fed is either cutting rates or when it signals that it will deliver more cuts ahead.
Some analysts anticipate that the BoJ will point to more cuts later this year because of the ongoing recession risks in the US.
Nikkei 225 index analysis
Nikkei 225 index chart by TradingView
The daily chart shows that the Nikkei index has moved sideways in the past few years. It has remained inside the key support and resistance levels at ¥37,790 and ¥40,000.
The index made a bearish breakout below the support last week and bottomed at ¥35,960. It has now rebounded and moved inside the channel.
The Nikkei 225 index remains below the 50-day moving average, meaning that it is still at risk of more downside. If this happens, the next key level to watch will be at ¥35,960. More gains will be confirmed if the Nikkei index rises above the 50-day MA and the upper side of the channel at ¥40,000.
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