The Nikkei 225 Index continued its strong surge, reaching its all-time high after Japan’s inflation softened and as the Bank of Japan left interest rates unchanged. It jumped to a record high of ¥45,652, up sharply from the year-to-date low of ¥30,745.
This article explores the top reasons why the index has soared in the past few months.
Nikkei 225 Index jumped as the BoJ resisted hikes
One of the main reasons why the Nikkei 225 Index has soared this year is that the BoJ has resisted hiking interest rates despite a stubbornly high inflation rate.
The continued pause is different from what happened in 2024 when the bank exited negative interest rates and delivered hikes for the first time in decades.
The bank will likely maintain rates at the current level for a while as inflation has started moving in the right direction.
A report released by the statistics agency showed that the headline Consumer Price Index (CPI) softened from 3.1% in July to 2.7% in August. The core CPI also moved downwards to 2.7, while inflation excluding food and energy fell to 3.3% from 3.4%.
In a statement, the Bank of Japan left interest rates unchanged at 0.5% on Friday and maintained its data-dependence. The statement said:
“Japan’s economic growth is likely to be moderate, as trade and other policies in each jurisdictions lead to a slowdown in overseas economies and to a decline in corporate profits and other factors.”
While some analysts expect a rate hike either this year or in 2024, there are chances that the BoJ will resist doing that if inflation continues falling.
The other notable outcome of the meeting is that officials decided to sell its exchange-traded funds and Japan real estate investment trusts gradually to avoid destabilizing the market.
Warren Buffett Japan investments
The Nikkei 225 Index has jumped because of the confidence expressed by Warren Buffett, one of the best investors globally.
Buffett started accumulating shares in the biggest Japanese trading houses like Mitsubishi, Mitsui, Marubeni, Itochu, and Sumitomo. He now holds shares worth at least $3 billion in each of these companies, with most of them being in Mitsubishi.
In a visit to Japan last year, Buffett noted that he was a strong proponent of Japan and that it had some highly undervalued companies. That action incentivized investors to flock to Japan.
Japan and US trade deal
The Nikkei 225 Index has also jumped after the United States and Japan reached a trade deal. In it, Japanese goods are being charged a 15% tariff, while Japan is committed to buy agricultural products worth about $8 billion a year.
Most importantly, Japan agreed to invest $550 billion in sectors the administration favors like semiconductors, shipbuilding, and manufacturing. According to Donald Trump, most of the profits from these investments will go to the United States.
While a 15% tariff is a bad thing for Japan, the deal brought certainty, which drew investors to the stock market. This also explains why other top indices like South Korea’s KOSPI, Australia’s ASX 200, and the German DAX have soared.
Nikkei Index has strong technicals
The Nikkei Index has also jumped because of its strong technicals, which point to a high momentum.
It has remained above the 50-day and 100-day Exponential Moving Averages (EMA), while the Relative Strength Index (RSI) and the MACD have kept rising.
Therefore, the most likely scenario is where the index continues rising as bulls target the next key resistance at¥46,000.
The alternative scenario is where the index pulls back and retests the important support level at ¥43,855., the highest swing in August this year.
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