Nikkei 225 Forecast: AI Momentum Supports Rally Despite BOJ Headwinds

The Nikkei 225 remains supported on Tuesday as Asia Pacific markets opened with risk-on mood despite President Donald Trump’s caution that the U.S.-Iran ceasefire agreement was on “massive life support.” The Asian markets continue to rally on AI trade. This indicates that, despite geopolitical uncertainties, rising oil prices and inflation fears, investors remain willing to buy stocks. But Japan’s market is now in more complex situation as household spending strength dries up, bond yields start to climb, and the Bank of Japan outlook turns hawkish.

Global Risk Appetite Supports the Nikkei 225

Japanese shares are rising amid the latest rally in global indexes. Investors don’t react all that strongly to geopolitical news any more unless the news actually has a negative impact on earnings, growth or liquidity. That explains the Asian stocks’ positive start despite fresh doubts over the U.S.-Iran ceasefire. The market seems to be viewing the war as a risk that it is monitoring rather than an excuse to get out of equities. This trading pattern has been instrumental in helping stocks withstand the pandemic, economic inflation, rate hikes, tariffs and now the Middle East conflict.

In addition, the Nikkei 225 is gaining from robust regional support. The Kospi of South Korea surged more than 2% to its highest level ever and Hong Kong futures were marginally higher. That indicates that investors have continued to shift into Asian risk assets. The global equities market is also finding support from retail flows, leveraged ETFs, call options and hedged equity strategies. These flows can drive up the price of underlying stocks as the dealers take on a hedge position. This can reinforce the short term rallies even in the face of macro risks.

Weak Spending and BOJ Rate Risk Create a Domestic Headwind

But the picture is different in Japan. The chart below shows that the household spending dropped by 2.9% in March. The spending continues to drop for the fourth consecutive month.

This is important because sluggish consumer spending can limit the potential for growth in Japan’s economy. Meanwhile, the average cash earnings in Japan increased by 2.7% in March. The inflation adjusted real wages growth was 1% YoY in March for the third consecutive month, potentially keeping the Bank of Japan on the case of inflation.

That should make a tricky balance for the Nikkei 225. Weak demand suggests caution, whereas inflation and higher wages, both oil-related, suggest that tighter policy is needed. Japan’s 10-year government bond yield has already risen to a 29-year high as BOJ policymakers hinted at a turn to tougher policy. Japanese stocks could come under pressure if the BOJ hikes rates in June. This pressure may increase if the yen appreciates further and bond yields increase.

Nikkei 225 Technical Analysis: Bullish Momentum Builds Above 60,000

The daily chart for the Nikkei 225 shows strong positive price action after the correction from the 63,800 level.

The formation of multiple price compressions during the last month, followed by the breakout above 60,000, indicates strong bullish momentum in the Nikkei 225. Therefore, this correction will likely be considered another buy signal for the next move towards the 65,000 area.

The daily candles for the Nikkei 225 remain constructive. The candles show a positive trend from current levels, as long as the 60,000 level holds. The index is likely to reach 65,000 in the next few sessions.

Bottom Line

The Nikkei 225 remains supported by strong global risk appetite and bullish regional sentiment. But Japan’s domestic backdrop creates some caution. As weak household spending could cap growth, inflation risk and 29-year high bond yields are adding pressure on the BoJ to hike rates. This makes the setup a mixed one from macro point of view. But the technical situation is still remaining strong because of the breakout above 60,000. The bullish view will stay intact as long as the index maintains this level.