The NIKKEI225 opened down 0.18% with concerns of BoJ intervention to defend the yen building up.

Previous intervention from the BoJ to keep bond yields higher have scared off many investors. When stocks compete with uncertain returns against bonds where yields are rising, the shift from stocks to fixed income is quick.

The market suffered after the last decrease in bond buying from the central bank but managed also to recover from that round. Concerns are rising that the BoJ will intervene again in the bond market to defend the yen.

The yen has been a concern for many BoJ and government officials, the latest rally in USD/JPY took the market to a high of 160.21. Speculation has been that the BoJ intervened shortly after that peak, although no officials have confirmed it.

However, these methods are rarely long lived, as we have been able to see, the USD/JPY is still hovering around 157.00. The other mechanism the BoJ has to defend the yen is acting on interest rates.

Although the possibility of another interest rate hike is there, it seems unlikely, given the slow growth of the economy. However, the central bank could intervene by pushing bond yields higher.

In this case, the institution has a lot more fire power and could play the game for as long as it takes to stabilize the FX rate. This action would almost certainly come at a cost for the stock market, at least initially.

Technical View

The day chart for the NIKKEI225 below shows a market that is still in consolidation phase. After peaking at a new all-time high on March 21, the market corrected back down to the Ichimoku cloud.

The cloud has been providing support ever since then, as the price pattern creates an upward sloping rectangle. Yesterday’s candle bounced off the support of the top side of the cloud, while today’s candle has met with resistance from the same cloud.

The upward sloping rectangle (yellow area) typically leads to a break to the downside. However, in this case the market has found support on the cloud, yet failure to break the topside of the cloud could lead to the market testing the bottom of that area (pink).

A break of the cloud to the downside would signal bearish momentum. And it would also coincide with a break of the rectangular pattern, also a bearish signal.