The Nikkei 225 Index has experienced a strong comeback in the past few weeks, as investors have focused on the potential trade deal between the United States and Japan. It also jumped as the odds of more Bank of Japan (BoJ) hikes fell. It was trading at ¥36,000 on Wednesday, up nearly 17% from its lowest point this month.
Why the Nikkei 225 Index has rebounded
There are three primary reasons why the Nikkei Index has rebounded over the past few weeks. First, the rebound is part of the ongoing stock market rally. Indeed, a closer look at most top global indices like the Hang Seng, Nasdaq 100, and S&P 500 has all rallied by double digits in the past few weeks.
Second, the index has jumped as Japan and the US continue to negotiate on a trade deal that will let the US lower tariffs. The two countries have already held the first round of talks, and officials are now preparing the second phase. These talks primarily focus on farm products and the automotive sector.
Japan and the Nikkei 225 Index needs a trade deal that will lower the tariffs on the auto sector. That’s because the current 25% tax rate is not sustainable for Japan as its vehicles will become unaffordable to US citizens.
Trump hopes that the tariffs on vehicles and parts will encourage more Japanese companies to relocate their production to the US, thereby reducing the deficit. A report released earlier this month showed that Japan had a whopping $63 billion surplus against the US last month.
Bank of Japan decision
The Nikkei 225 Index has also jumped as investors slashed their Bank of Japan (BoJ) rate hikes forecasts as the economy softened.
A report released on Thursday showed that Japan’s industrial production dropped by 1.1% in March, as the automobile tariffs took effect. The 1.1% contraction was weaker than the median estimate of minus 0.4% and the February growth rate of 2.3%.
More data showed that Japan’s retail sales declined by 1.2% in March, a larger contraction than the median estimate of 0.4% increase.
Therefore, analysts expect that the BoJ will leave interest rates unchanged when it concludes its meeting on Friday.
This explains why Japan bond yields have remained under pressure in the past few days. The yield on the ten-year retreated to 1.30%, down from the year-to-date high of 1.588%. Similarly, the 30-year yield has dropped to 2.7% from the year-to-date high of 2.90%.
The BoJ has been one of the most hawkish central banks in recent months, having delivered two rate hikes. It did that in its fight against inflation as consumer prices jumped. The most recent data showed that Japan’s inflation stood at 3.6% in March, higher than the target of 2.0%.
Nikkei 225 Index technical analysis
Nikkei Index chart | Source: TradingView
The daily chart shows that the Nikkei 225 Index has bounced back in the past few weeks even as tariffs remained. It moved from a low of ¥30,850 earlier this month and reached the current ¥36,000.
The index has already moved above the 25-day moving average, and is about to cross the 50-day MA. A complete move above the 50-day MA will lead to more gains, potentially to the key resistance level at ¥37,645, the lowest swing in October last year. A drop below the 25-day MA point at ¥35,110 will invalidate the bullish outlook.
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