Nikkei 225 Index forecast: Is it a buy if BoJ hikes rates?

The Nikkei 225 Index remained under pressure on Tuesday as market participants reacted to hints that the Bank of Japan (BoJ) will hike interest rates, even as inflation moderates. The index dropped for the second consecutive day, reaching a low of ¥49,400, which is ~6.30% below its highest point this year. 

Bank of Japan potential rate hike

The Nikkei 225 and Topix indices remained below their highest levels this year as investors reacted to a statement by Kazuo Ueda, the head of the BoJ.

In his statement, he hinted that the bank may decide to hike interest rates. Such a move, which some analysts were expecting, is notable as it comes as the country’s inflation eases. Data compiled by the country’s statistics agency noted that the headline inflation has dropped from 4.0% in January to 2.7% in November.

The rate hike will come as the Japanese yen remains under pressure this year. The USD/JPY exchange rate rose to a high of 157.88, up by over 12% from the lowest point this year. As such, a rate would be a way of the bank boosting the value of the yen.

Most notably, the BoJ rate hike will come as the Federal Reserve considers cutting interest rates for the third time this month. Some officials have hinted that they will support rate cuts this month, citing the performance of the labor market as the unemployment rate has jumped to 4.3%.

A Federal Reserve interest rate cut coinciding with the Bank of Japan rate hike will have an impact on the stock market as traders unwind their carry trades.

Key Japanese stocks have slumped recently 

The ongoing Nikkei 225 Index performance shows that some notable companies have slumped in the past few weeks.

For example, the Softbank stock price has crashed to ¥16,000, down by 42% from its highest level this year. The stock has plunged after the company sold its Nvidia holdings and as it borrowed heavily to fund its AI ambitions.

For example, the company committed to invest up to $40 billion in OpenAI, and has raised a margin loan worth over $13.5 billion by pledging its Arm shares.

At the same time, its Bitcoin holdings have slumped in the past few months as the coin has dropped from $126,300 to $85,000 today.

Other Nikkei 225 Index companies that slumped on Tuesday were popular names like Tokyo Electric Power, Furukawa, Toho Zinc, Pacific Metals, Daiichi Sankyo, Japan Steel Works, and Nikon Corporation.

On the other hand, some key companies have done well in the past few months. For example, top Japanese banks like Sumitomo Mitsui Banking rose to a multi-year high. MUFG stock has jumped by 55% from its lowest level in April this year. Mizuho stock jumped to ¥6,600, a record high, while Resona rose to ¥1,600, its highest level since 2007.

Nikkei 225 Index technical analysis 

Nikkei 225 Index chart | Source: TradingView

The daily timeframe chart shows that the Nikkei 225 Index has come under pressure in the past few weeks, moving from the year-to-date high of ¥52,627 in November to the current ¥49,387.

It has moved above the ascending trendline that connects the lowest swings since August this year. It has remained above the 50-day and 100-day Exponential Moving Averages (EMA).

Therefore, the stock will likely resume rising as bulls target the key resistance level at ¥52,626. This outlook will remain as long as the index is above the ascending trendline.