Nikkei 225 index analysis: September 18 and 20 will be key dates

The Nikkei 225 index had a highly volatile performance in August as most constituent companies published their financial results, and after the Bank of Japan (BoJ) hiked interest rates by 0.25%. 

The index, which surged to a high of ¥42,433 in July, tumbled by 26.56% to a low of ¥31,202, its lowest point since November last year. It then bounced back by over 24% to trade at ¥38,655.

September 18 and 20 will be crucial

The Nikkei 225 index’s key catalysts for September will happen on the 18th and 20th when the Federal Reserve and the Bank of Japan (BoJ) delivers their interest rate decisions.

Economists have already priced in a 0.25% rate cut by the Fed, although this could change if the labor market continues to deteriorate. If this happens, the Fed will likely slash interest rates by 0.50%.

Actions by the Federal Reserve have major implications in Japanese and other global stocks. In most cases, these indices do well when the Fed is slashing rates. For example, most indices have recovered after Jerome Powell’s speech at the Jackson Hole Symposium, where he hinted that the bank would cut rates in September.

The Nikkei 225 index will react to the actions by the Bank of Japan, which has embraced a fairly hawkish tone. It hiked rates by 0.10% in March and made another 0.25% increase in July.

BoJ’s rate hikes are notable because the bank has been one of the most dovish ones globally such that it left them in the negative zone for a long time.

The hikes are also important because of the carry trade that has existed for a long time. A carry trade is a situation where investors borrow cash at low interest rates and invest in high-yielding assets.

In most cases, investors borrowed in Japan and invested in other countries like the United States and Australia.

At the same time, some investors borrowed in Japan and invested in equities, which have historically done well. 

Therefore, with the BoJ hiking, many investors have started to unwind the carry trades. There is also a fear that some investors will start moving to Japanese bonds, which have started to pay a return after many years.

A potential risk for the Nikkei 225 index is that the Japanese yen could bounce back this year. The USD/JPY exchange rate has moved into a bear market after falling by 10% from its highest point this year.

In most cases, Japanese companies do well when the Japanese yen is falling because many of them are in the export industry.

Top performers in the Nikkei index

Higher interest rates have made Japanese banks some of the best-performing companies in the Nikkei 225 index. 

Nomura, one of the biggest Japanese banks, has jumped by over 32% this year. Mitsubishi UFJ Financial stock has also risen by over 27% while Sumitomo Financial, Mitsui, and Mizuho have all jumped by over 30%.

These banks will benefit as interest rates rise because of the Net Interest Margin (NIM) aspect. NIM refers to the difference between the rates the banks lend and the one they pay their depositors.

The Nikkei 225 index has had other good-performing companies. For example, Mitsubishi Heavy Industries stock has jumped by over 134% while IHI Corp has risen by 140%. IHI is involved in the engineering and construction industries.

The other top-performing Nikkei 225 index company was Fujikura, a company that provides solutions in the telecom, energy and infrastructure, and automotive components.

Companies like NEC Corp, TDK, Kansai Power Electric, and Japan Steel Works have also done well after rising by over 40% this year. 

However, not all companies in the Nikkei 225 index have done well this year. Some of the top laggards are firms like Nippon Paper Industries, Nissan Chemical Industries, M3, and Lasertec, which have all fallen by over 30%.

Nikkei 225 index analysis

The Nikkei 225 index has done well this year despite the recent volatility. It has risen by over 15% this year and by 24% from its lowest point in August. This recovery has also coincided with the rebound of the USD/JPY pair, which has risen from a low of 141 in August to 145.8. 

The index rebounded after forming a long hammer candlestick pattern, a popular bullish sign. It has also risen above the key point at ¥36,728, its lowest swing on April 19th. 

It has also jumped above the 50-day and 100-day Exponential Moving Averages (EMA), a popular bullish sign. The Relative Strength Index (RSI) and the MACD indicators have also pointed upwards.

Therefore, the stock will likely continue rising as bulls target the next key resistance point at ¥41,000. A break above that level will lead to more gains to its record high of ¥42,483.