I am buying Japan’s Nikkei 225 index and this is why

on Aug 8, 2023
  • The Nikkei 225 index has formed a bullish flag pattern on the 4H chart.
  • The decision of the Bank of Japan could lead to more inflows to Japan.
  • The index has already jumped by more than 25% from the YTD low.

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Japan stocks have lost their momentum recently. After soaring to a multi-decade high of ¥33,845 in June, the Nikkei 225 index has retreated by more than 4.55%. Despite the pullback, the index has jumped by more than 25% from the lowest level this year.

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Global growth concerns

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The Nikkei index has retreated in the past few days as investors remained concerned about the global economy, earnings, and the recent change of tune by the Bank of Japan. 

The most recent numbers showed that key economies are slowing. On Tuesday, data from China revealed that exports and imports dropped by double-digits in July. The country likely entered into deflation during the month while youth unemployment has jumped.

Other developed countries are barely growing. For example, Germany, the biggest economy in Europe, has entered a recession. These numbers are important because many Japanese companies do a lot of business in China, Europe, and North America.

The Nikkei 225 index has also slipped because of the recent actions by the Bank of Japan. In a statement last month, the bank decided to tweak its yield curve control program. As a result, the yield of Japanese bonds has jumped to the highest level in more than nine years. 

Some analysts believe that the move by the Bank of Japan will have a positive impact on equities as funds flow back to the country. In a recent note, an analyst at Pictet said:

“What is clear to us is that with this change today there will be a repatriation of money from abroad into Japan, which will affect equities as well. Japan is ending deflation so Japan becomes a more normal place to invest.”

The Nikkei 225 index has also wavered as inflows into Japan ease. These inflows jumped earlier this year when Warren Buffett traveled to the country and boosted his investments in sogo-shoshas.

Nikkei 225 index forecast

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The 4H chart shows that the Nikkei index has moved sideways in the past few weeks. In this case, it has formed a narrow descending channel shown in green. The price is slightly above the lower side of this channel.

The Nikkei 225 index has also moved slightly below the 25-day moving average. Most importantly, it has formed what looks like a bullish flag pattern. In price action analysis, this is one of the most popular signs of a bullish continuation.

Therefore, the outlook for the Nikkei 225 index is bullish, with the initial target being at ¥33,442, the upper side of the flag pattern. A break above that level will bring the YTD high of ¥33,836 into view. 

The bullish view will become invalid if the price moves below the lower side of the bullish flag pattern. If that happens, the next point to watch will be at ¥31,000.


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