As the Nikkei 225 index surges, is Bank of Japan a risk?

The Nikkei 225 index continued rising even as hopes of a Bank of Japan (BoJ) will start hiking interest rates rise. The index, which tracks the biggest companies in Japan, soared to a high of ¥36,280, a few points below the YTD high of ¥37,000. It has spiked by more than 122% from its lowest point in 2020, outperforming the S&P 500 and the German DAX.

Bank of Japan (BoJ) rate hikes

The Nikkei 225 index has been one of the best-performing indices in the past few years. This rally happened as many investors moved from the troubled Chinese markets to Japan, a country that is seen as a safe haven. Indeed, the key Japanese indices like Topix are sitting at a multi-decade high as China’s A50 and the Hang Seng have all plunged.

Japan stocks have also surged because of actions by the Tokyo Stock Exchange (TSE) to give companies flexibility to boost their share prices. For example, companies with a price-to-book ratio of less than 1 have been pushed to increase their valuations. The exchange has also given companies more flexibility on share buybacks.

As a result, the net buying of Japan stocks has been in a strong uptrend, crossing over ¥3 trillion in 2023. Most of these foreign buyers were from Western countries like the United States, Europe, and Asia-Pacific.

The next key risk that could affect the Nikkei 225 index is the upcoming actions by the Bank of Japan. In its monetary policy meeting last week, the bank decided to leave interest rates unchanged as most analysts were expecting. 

However, the bank also hinted that it was on track to hike interest rates for the first time since 2007. That will be a major change that will have a major impact in Japan, a country whose economy is slowing. Data published on Wednesday revealed that industrial production slowed to 1.8% in December while retail sales slowed to 2.1%.

Higher interest rates in Japan would be good news for Japan banks, which have seen their net interest income (NII) plunge over the years. They include companies like Mitsubishi UFJ Financial, Sumitomo Mitsui, Mizuho, and Japan Post Bank.

Nikkei 225 index forecast

Nikkei chart by TradingView

The weekly chart shows that that the Nikkei index has been in a spectacular rally in the past few months. Most recently, the index crossed the important resistance point at ¥33,800, its highest swing on June 19th. 

The Nikkei 225 index has surged above the 50-week and 25-week Exponential Moving Averages (EMA). Further, the Relative Strength Index (RSI) is approaching the overbought point at 70. This is a sign that the index still has a bullish momentum.

However, it has also formed an evening star pattern, which is one of the most bearish signs. Therefore, while more gains are possible, the index could also retreat and retest the key support at ¥33,800.