Nikkei 225, Japan, BoJ Talking Points:

  • Nikkei 225 rises to post-crisis highs as economic outlook remains grim
  • Unprecedented fiscal and monetary stimulus continues to fuel the rally
  • Could the Japanese benchmark push back to yearly highs?

The Nikkei 225 continues to outperform its major Asia/Pacific counterparts, with the index surging 50% from its March low as it pushes back to pre-crisis levels.

Even though Japan enters its first recession since 2015, the injection of over ¥ 200 trillion in fiscal and monetary stimulus to support the pummelled economy continues to drive the Japanese benchmark index higher. With Prime Minister Shinzo Abe announcing a further ¥117 trillion of stimulus on the 27th of May, while the Bank of Japan (BoJ) implementing a new ¥30 trillion small business lending facility, the cooperation between the government and central bank shows the determination to protect the local economy during a crisis, described by Deputy Prime Minister Taro Aso, “that goes beyond the scale of the Lehman shock”.

Doubling the pace of ‘risky asset’ purchasing in March has seen the BoJ’s balance sheet continue its meteoric rise, and considering the weakness seen in recent economic data prints, this trend is unlikely to desist anytime soon.

Image of Bank of Japan balance sheet

Source: Bank of Japan, FRED

Nikkei 225 Daily Price Chart

Image of Nikkei 225 index daily chart

Source – Trading View

Breaking back above the 200-day moving average (21,765) at the end of May has pushed the Nikkei to post-crisis highs.

The technical readings remain positive as the Relative Strength Index (RSI) registers its first overbought readings since November 2019, while the momentum oscillator retraces from its highest recorded daily readings.

Future development in the 50-MA and 200-MA may reinforce the bullish signal in RSI and momentum as the steepening of both gradients may lead to a ‘golden cross’.

However, with price failing to close above the former support-turned-resistance zone extending from the 2009-lows (23,000) and RSI beginning to slide back below 70, there is a possibility of a pullback towards trend support and its convergence with the 78.6% Fibonacci (22,278).

The 200-MA (21,285) provides the next key region of interest should price penetrate trend support, with the last line of defence at the 61.8% Fibonacci (20,795).

A daily close above the extreme of the 2009 support-turned-resistance zone may carve a path towards the 2020 open (23,449), with a re-entry of RSI into overbought territory signalling a possible push to test the yearly high (24,244).

— Written by Daniel Moss

Follow me on Twitter @DanielGMoss





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