NIKKEI Faces Pressure from Higher Bond Yields & Weak Yen

The stock market has seen an impressive rally during the first part of the year, with strong demand from foreign investors.

However, the recent correction in the broader stock market, NIKKEI225 down 6.3%, is also mostly due to fading interest from abroad. The weak yen has made Japanese stocks less attractive.

At the same time, BoJ intervention to raise bond yields has also made stocks less attractive. The central bank may also have also intervened in the forex market in an attempt to stop the yen’s decline, creating more uncertainty.

Foreign investment in Japanese shares was ¥1.8 trillion during the first 2 weeks of April, compared ¥439 billion in the most recent 2 weeks. A sharp decline, which may continue as the BoJ maintains a hawkish stance on interest rates and the yen continues to weaken.

Sentiment on interest rates is pivoting towards a later cut from the Fed rather than sooner, while the BoJ is expected to raise interest rates, if anything. Although it’s likely the BoJ will continue to buy fewer bonds to prop up yields and defend the yen to fend off imported inflation.

Technical View

The day chart below for the NIKKEI225 shows the market on the Ichimoku cloud as the correction found support from the cloud. Today’s candle is green for now after 3 red candles, all within the cloud.

The cloud is considered no-man’s land, an area of uncertainty. The current formation (yellow area) of a sloping rectangle indicates consolidation. Typically, this formation leads to further downward price action.

However, we are also on the support of the cloud, so if that is not broken, we may see another rally. The next resistance level are at 38,893 (green line) and 39,987 (blue line). To the downside the market should find support Kijun line at 38,109 (crimson), and then at 36,703 (black line).