Here’s why the Nikkei 225 Index moved into a correction

The Nikkei 225 Index retreated by over 3% on Friday, mirroring the performance of American equities, with the Dow Jones and Nasdaq 100 falling by 200 and 60 points, respectively. The Japanese index dropped to ¥53,370, down by 10.10% from its highest point this year. 

Japanese stocks amid inflation concerns 

The Nikkei 225 Index has come under pressure as global stocks remained on edge amid the ongoing Iran war that has pushed energy prices higher. Brent, the global benchmark, jumped to $115 on Thursday, before pulling back.

The Bank of Japan flagged the rising energy risks as a major concern on Thursday when it delivered its interest rate decision. It left interest rates unchanged and hinted that it may be forced to intervene by hiking interest rates in the coming months.

On the positive side, oil prices have pulled back on Friday, with Brent and West Texas Intermediate (WTI) falling to $107 and $93, respectively. The two benchmarks dropped after US warplanes and helicopters started a major battle to reopen the Strait of Hormuz. 

Traders believe that these actions may lead to the resumption of shipments in the important strait, leading to lower prices in the coming weeks. Japan would benefit substantially from the reopening of this narrow strait as it imports most of its energy resources from the region.

Japan stocks also dropped after the latest meeting between Donald Trump and Sanae Takaichi in Washington on Thursday. Trump pressed Japan’s president for help on Iran, even as he referenced the Pearl Harbour attack.

Most Japanese companies were in the red on Friday. Sumitomo Metal Mining stock dropped by over 8.7%, making it the top laggard in the index. This retreat happened as most commodities like gold, copper, and silver tumbled.

Tokyo Electric Power Company stock dropped by 8.4%, while DOWA, TOPPAN, Mitsubishi Materials, Toyota Tshusho, and Shimizu Corporation dropped by over 6.70%. Other top laggards in the index, were companies like Mitsui, Yokohama, Marubeni, Mitsubishi, Softbank, and Itochu, fell by over 5%.

Only a handful of companies were in the green, including firms like BayCurrent, Furukawa Electric, Inpex, and NTT were in the green.

Nikkei 225 Index technical analysis 

Nikkei Index chart | Source: TradingView 

The daily chart shows that the Nikkei 225 Index has retreated in the past few weeks, moving from a high of ¥59,332 on February 26 to the current ¥53,372.

It has dropped below the ascending trendline, which coincides with the lowest swings since August 6 last year. After moving that trendline below, it then retested it, confirming the bearish outlook.

The stock has now dropped below the 50-day Exponential Moving Average (EMA), while the Percentage Price Oscillator (PPO) and the Relative Strength Index (RSI) have moved downwards.

Therefore, the index will likely continue falling, with the next major target being at ¥51,388, its lowest level on May 9. A move below that level will point to more downside, potentially to the key support ¥50,000.