Nikkei 225 Forecast: Oil Spike and Weak Output Hit Japan Stocks Below 60,000

The Nikkei 225 fell as investors responded to higher oil prices, a decline in U.S. equities and new concerns for Japan’s manufacturing sector. The market reopened after a holiday against a challenging international background. The rising tensions between US and Iran continued to put pressure on the market. This put pressure on Japanese markets and corrected the Nikkei 225 after a brief rally above 60,000.

Higher Oil Prices Put Pressure on Japan’s Market

The Nikkei 225 dropped to 58,500 on Wednesday as markets digested the most recent spike in energy prices. Brent crude was trading close to $120 a barrel and WTI oil remained above $107. This is important for Japan as it is an energy importer. Any sustained instability in the Middle East can quickly send prices up for businesses, consumers and manufacturers.

There was also pressure from the U.S. The Dow Jones Industrial Average failed to break above 50,000 and dropped. On the other hand, the S&P 500 was slightly down on Wednesday. This bearish trend in the U.S. contributed to Japanese pessimism. With futures in the U.S. recovering, Japanese investors were nevertheless concerned about oil, inflation and the impact a higher oil price might have on profitability.

Weak Factory Output Adds Another Risk for Nikkei 225

Industrial production in Japan dropped to 0.5% in March. This was the second consecutive monthly decrease and the result was worse than expected growth. The decline was led by chemicals and fuels, which were hit by Middle East supply problems. Polyethylene production was down 27%, with polypropylene down 15%.

There was also weakness in fuel production. Output of gasoline fell 7.3%, while diesel production was down 14.3%. This is noteworthy because Japan imports 95% of its crude oil from the Middle East, with much of which travels through the Strait of Hormuz. And manufacturers surveyed by the Ministry of Economy, Trade and Industry (METI) expect output to decline further in April. This leaves the Nikkei 225 exposed especially if oil prices remain high and supply problems persist.

Nikkei 225 Technical Analysis: Breakout Setup Forms Between 58,000 and 60,000

Despite uncertainty in the Middle East, the Nikkei 225 is consolidating between 58,000 and 60,000 and looking for its next direction.

The emergence of price compression between 58,000 and 60,000 indicates further upside in the next few weeks, if the 60,000 is broken. This strength is seen in the AI industry and semiconductor stocks. However, a break below 58,000 will indicate further downside toward the 55,000 level.

These consolidations are also observed on the 4-hour chart, which shows the formation of a cup pattern above the 50,000 level. The rounding cup pattern indicates that the pattern remains strongly bullish, but the price remains uncertain in the short term. A successful breakout above 60,000 will likely strengthen the Nikkei 225.

On the other hand, the hourly chart shows the formation of an ascending broadening wedge pattern at the record level of 60,000. The push higher on Monday to hit the 60,800 level was exactly at the ascending broadening wedge resistance. Now, the next move remains uncertain.

Bottom Line

The Nikkei 225 is under pressure due to the rising oil prices, slowing industrial production and geopolitical tensions in the Middle East weighing on the market. The Japanese index is more vulnerable to a sustained oil supply disruption as it is a large importer. But the technicals are still strong if the index remains above 58,000. The index could resume its bull run and trigger a fresh rally in the AI and semiconductor sector if it breaks above 60,000. But a move below 58,000 would be bearish for the short term and could test 55,000.