Nikkei 225 Index retreats as odds of BoJ interest rate hike jumps

The Nikkei 225 Index retreated for the fourth consecutive day as global equities continued the recent pullback, reaching a low of ¥56,355, down substantially from the year-to-date high of ¥58,000. 

BoJ to hike interest rates in April 

The Nikkei 225 Index retreated on Tuesday after an influential Japanese official hinted that the Bank of Japan will hike interest rates as early as in April. In a statement, Seiji Adachi, a former senior official at the Bank of Japan (BoJ) said that the most likely scenario is a hike in April.

Adachi believes that a rate hike in March would be risky as it would be based on expectations and not confirmation.

Odds of another interest rate hike rose after BoJ head, Kazuo Ueda, met with Sanae Takaichi, the popular Prime Minister, who recently won a strong mandate. Ueda noted that Takaichi will not interfere with the bank's mandate.

Odds of a new BoJ interest rate cut rose after Japan released the latest GDP report on Tuesday. The report showed that the Japanese economy expanded by 3.5% in the fourth quarter from the previous 3.4%. This growth was much higher than what analysts were expecting.

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The economy expanded by 0.1% in the fourth quarter from the previous one, a big improvement after it contracted by 0.7% in the third quarter.

More data showed that Japan's industrial production rose by 2.6% in December after contracting by 2.7% in November last year. In most cases, the stock market tends to underperform when the central bank is hiking interest rates.

The next key macro data to watch from Japan will be the upcoming machinery orders, which will come out on Thursday. Japan will also release the latest consumer inflation report on Friday, with analysts predicting the headline CPI coming in at 1.o% and the core CPI falling to 2%.

S&P Global will also publish the latest manufacturing and services PMI numbers on Friday. Economists expect the data to show that the manufacturing PMI rose to 52, while the services figure rose to 53.3. These numbers will confirm that the Japanese economy is doing well.

The Nikkei 225 Index is also falling as investors remain concerned about the potential disruption from the artificial intelligence solutions. For example, companies in key industries like wealth management, transport, and insurance brokerage dropped sharply after the launch of top AI tools.

The top laggards in the Nikkei 225 Index were companies like Toho Zinc, Kawasaki, Softbank, Hitachi, Recruit Holdings, and Japan Steel Works. All these companies dropped by over 4.5% on Tuesday. On the other hand, companies like Sumco, Sumitomo Dainippon, Nissan, Nikon, and Dai-Ichi Life were among the top gainers in the index.

Nikkei 225 Index technical analysis 

Nikkei 225 chart | Source: TradingView

The daily timeframe chart shows that the Nikkei 225 Index has pulled back in the past few months, moving from a high of ¥58,000 to the current ¥56,240. The Relative Strength Index (RSI) has dropped below the overbought level of 72 to the current 61.

It has remained above the 50-day and 100-day Exponential Moving Averages (EMA). It also sits at the Ultimate Support of the Murrey Math Lines tool at ¥56,250.

Therefore, the most likely scenario is where the index bounces back and hits the year-to-date high of ¥58,000.