The Nikkei 225 index has bounced back this month as the US and Japan continued their negotiations on tariffs. After falling to a low of ¥30,800 on Trump’s Liberation Day, it has rebounded by over 12.4% to the current ¥34,610. It is hovering at the highest point since April 3.
This article provides a Nikkei 225 Index forecast as talks continue and the USD/JPY pair crashes.
US and Japan trade talks
The Nikkei 225 index has bounced back in the past few weeks after Trump hinted that the US and Japan were talking on trade. In a statement on Wednesday, he posted a picture with the negotiating team.
While the Japanese team left the US without a deal, there are chances that the two countries will likely reach a deal.
Trump wants Japan to help the US narrow its trade deficit, which has continued to widen in the past few years. Data released on Thursday showed that Japan made a $63 billion surplus with the US in the fiscal year through March.
Analysts believe that a Japanese deal will involve it buying more US goods, like energy and military equipment. Japan may also commit itself to spending more money on defense.
The rising hopes of a deal explain why the Nikkei 225 index has jumped in the past few weeks. A deal would be a good thing for Japanese companies that do a lot of business in the United States like Nissan, Toyota, and Honda.
Bank of Japan likely to pause hikes
The Nikkei 225 index has also jumped as the ongoing trade war raises the probability that the Bank of Japan (BoJ) will opt to maintain interest rates steady for long.
While inflation remains high, another interest rate hike would likely affect the economic growth. The most recent data showed that the headline Consumer Price Index (CPI) rose to 3.6% in March, while the core figure moved from 3.0% to 3.2%.
Most of this inflation is being driven by food prices. Rice, a staple food in Japan, has seen its price jump at the fastest pace in over 50 years.
Japan’s inflation growth is now higher than that of the United States, which narrowed to 2.4% in March. A Bloomberg analyst said:
“On one hand, inflation on the boil argues strongly for a reduction in stimulus. On the other, US tariffs are a risk to growth — a reason to hold. Our base case is for the central bank to stand pat at its next meeting and then hike in July.”
The Nikkei 225 index has also jumped as the Japanese yen has soared recently. Data shows that the USD/JPY exchange rate has plunged to a low of 142.32, its lowest level since September last year. It has dropped by over 10% from its highest point this year.
The soaring Japanese yen against the US dollar will be an added cost to Japanese companies like Toyota and Nissan that are exporting to the United States. That’s because their products are now 10% more expensive in the US.
Nikkei 225 index analysis
The daily chart shows that the Nikkei 225 index has made a V-shaped recovery as it jumped from a low of ¥30,800. It has now soared to a high of ¥34,630, and is hovering at the highest swing since April 3.
The Relative Strength Index (RSI) and the MACD indicators have all pointed upwards in the past few months. Therefore, the most likely scenario is where the index continues rising as bulls target the key resistance point at ¥36,000, the lowest swing in March, and up by 4% from the current level.
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