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The Nikkei 225 index has had a great performance this year, making it one of the best-performing global indices. It has jumped by more than 18%, beating the Nasdaq 100 index, which has risen by 16%.
Japan stocks and yen diverge
The Nikkei 225 index jump happened in the same period as the Japanese yen imploded. Yen, the third most popular currency, has crashed by over 14% this year and has moved to its lowest level against the US dollar. It has also plunged against other currencies like the euro and the British pound.
The USD/JPY pair soared because of the actions of the Bank of Japan (BoJ), which has left embraced low interest rates. While the bank hiked interest rates by 0.10% in March, they have remained at zero percent.
It is unclear whether the BoJ will ultimately hike interest rates because of the country’s heavy debt load. Over the years, Japan has accumulated over $9 trillion in debt, much higher than the country’s GDP of less than $5 trillion.
As such, more interest rate hikes will likely lead to more debt servicing costs, which will affect government spending. And with the Fed promising higher interest rates for longer, the carry trade opportunity will continue and put pressure on the Japanese yen.
Stocks tend to benefit from low interest rates by making the bond market unattractive, which explains why the Nikkei 225 index has jumped this year.
Tokyo Stock Exchange reforms
The Nikkei 225 index has also soared this year because of the ongoing reforms by the Tokyo Stock Exchange (TSX). As part of these reforms, the exchange has put more pressure on companies to boost their shares.
For example, the TSX has encouraged companies to increase their price-to-book ratios, boost efficiency, and profitability. As part of these changes, many companies have boosted their dividends and share buybacks.
The index also jumped as interest from foreign investors rose as many of them decamped from China. Warren Buffett can be credited for putting more focus on the country after he invested in the five trading houses: Mitsui, Itochu, Mitsubishi, Marubeni, and Sumitomo.
As a result, many foreign investors moved to Japan, where stocks are believed to be trading at discounts. The discount has widened because of the weaker Japanese yen.
Additionally, the rally was part of the global stocks rebound. A closer look shows that the stock market in most countries has done well this year. In the US, the S&P 500 and Nasdaq 100 indices have risen by double digits. Similarly, in Europe, top indices rose to record highs.
Most companies in the Nikkei 225 index rose sharply in the first half of the year. Some of the top gainers were firms like Mitsubishi Heavy Industries, Fujikura, Isetan Mitsukoshi Holdings, Concordia Financial Group, and Kawasaki Heavy Industries.
Nikkei 225 index forecast
The daily chart shows that the Nikkei index has been in a strong bull run after bottoming at ¥30,490 in October last year. This rally pushed it to the year-to-date high of ¥41,097.
It then pulled back and moved to a low of ¥36,740 in April and has now bounced back to almost ¥40,000. The index has also jumped above the key resistance point at ¥39,438, its highest point on May 20th.
It has now moved above the 50-day Exponential Moving Average (EMA) while the Relative Strength Index (RSI) has drifted upwards. Therefore, the index will likely continue rising as buyers target the year-to-date high of ¥41,097. This means that it could rebound by over 3.65% from the current level.
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