The Nikkei 225 and Topix indices are stuck in a correction as concerns about Japan’s economy continues and as traders wait for the next Bank of Japan (BoJ) interest rate decision. Nikkei was trading at ￥36,245, down by over 24% from its highest point this year.
Similarly, the Topix index fell to ￥2,590, down by over 12% from its highest level this year, and is 17% above its lowest level in August.
Japan economic weakness
The two top Japanese indices rose as investors reacted to Monday’s economic numbers from the country. In a report, the statistics agency said that the economy grew at a slower pace than expected in the second quarter.
The GDP expanded by 0.7% in Q2 after falling by 0.6% in the previous quarter. This economic growth was lower than the median estimate of 0.8%. The growth translated to a year-on-year increase of 2.9%, also, lower than the median estimate of 3.1%.
The economic growth was driven by a 0.9% jump in private consumption and 0.8% increase in capital expenditure and offset by a 0.1% drop in exports. The private consumption figure was smaller than the expected 1% while the capital expenditure report was lower than the expected 0.9%.
These numbers mean that the country’s economy was not growing as the market and the Bank of Japan (BoJ) was expecting.
Therefore, the implication is that the BoJ may decide to go slow when making its interest rate decision on September 20th. Japan stocks will likely do well when the BoJ halts rate hikes.
In its last decision, the bank decided to hike interest rates by 0.25%, catching most investors and analysts off-guard. The rate hike led to the unwinding of the Japanese yen carry trade, pushing the Nikkei 225, Topix, and other global stocks sharply lower.
Next Federal Reserve actions
The Topix and Nikkei 225 indices are also reacting to the next actions by the Federal Reserve, which is expected to start cutting interest rates later this month.
In a report on Friday, the Bureau of Labor Statistics (BLS) showed that the economy created 114k jobs while the unemployment rate fell to 4.2% and wage growth resumed.
The next key data to watch will be Wednesday’s US inflation report, which will provide more data on the state of the economy.
These numbers mean that the Federal Reserve will start cutting interest rates on September 19. In it, the bank will likely cut by 0.25%, since the labor market has been relatively resilient.
The Fed actions have a big impact on the Nikkei 225 and Topix indices. In most periods, these indices do well when the Fed is cutting rates. What is unclear, however, is how they will react to a Fed that is cutting rates and a BoJ that is relatively hawkish.
Japan political situation
Meanwhile, the Nikkei 225 index is reacting to the ongoing campaign period as politicians seek to replace Fumio Kishida.
Some of the top contenders are Sanae Takaichi, a protege of the late Shinzo Abe, Yoshiniko Noda, who served as the prime minister in 2011, and Shinjiro Koizumi, a former environment minister. Koizumi’s father served as Japan’s prime minister between 2001 and 2006.
The next Japanese prime minister has a lot of work to do as the country’s economy continues slowing. Notably, Japan has not been all that involved in some of the top emerging technologies like artificial intelligence and cloud computing.
Japan is also facing risks from China, which has become a leading producer of vehicles. Just recently, China overtook Japan to become the biggest vehicle exporter.
Also, China is gaining substantial traction in the Southeast Asian region that Japan has dominated for many years. As a result, in a recent FT interview, the head of Mitsubishi urged the government to intervene.
Credit Saison was the best-performing Nikkei 225 index company on Tuesday as it jumped by over 4%. It was followed by companies like Dainippon Screen Manufacturing, Tokyo Electron, Mitsui Mining and Smelting, and Ebara. All these companies jumped by over 3%.
On the other hand, the top laggards in the index were companies like Daiichi Sankyo, Taiyo Yuden, Mercari, and Lasertec. Other notable ones were Trend Micro, and Nippon Telegraph & Telephone.
Nikkei 225 index analysis
The Nikkei 225 index surged to a multi-decade high of ￥42,437 earlier this year and then suffered a harsh reversal to ￥31,156 as the Japanese yen carry trade unwinding continued. It then bounced back to a high of ￥39,058 on September 2.
The Nikkei index remains below the 200-day and 50-day Exponential Moving Averages (EMA), and the two are about to form a bearish crossover. It has also moved below the key support level at ￥36,745, its lowest swing on April 19. Therefore, the index will likely continue falling as sellers target the key support at ￥35,000.
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