Nikkei 225 Forecast: Yen Intervention Risk Caps Japan Stock Rebound

Nikkei 225 rebounded on Tuesday from a sizable decline last week. The index ticked up as oil prices continued to drop from the recent peak. The pause in attacks between Israel and Iran appeared to ease some of the uncertainty in the market. But the rebound did not seem very strong. The short term bounce from the lows after heavy selling seemed to be more of a recovery than a sign of the bulls returning.

Rising bond yields and rate hike concerns are the biggest pressures on the Nikkei 225. Investors have priced in greater risk of a rate hike from the Fed after the strong U.S. jobs data. This helps keep yields high and helps the U.S. dollar hold near 160 yen. The weaker yen would benefit Japanese exporters but also increase the threat of actions by Japanese authorities. This increases the uncertainty for the Nikkei 225.

Oil prices are important for Japan as the country depends heavily on imported energy. Brent crude oil ticked down, but sea travel remains restricted through the Strait of Hormuz. This keeps the inflation risks alive and heightens pressure for Japanese companies.

The Nikkei 225 could maintain its volatility for the time being. The index could be buoyed by a better performance from semiconductors, which are vital for the recovery of the broader economy. But the higher yields, risks to oil prices and yen intervention concerns keep the upside limited in the short term.

Nikkei 225 Technical Analysis: 63,700 Support Holds After Sharp Drop

The daily chart for Nikkei 225 shows that the correction began from the resistance of the ascending channel pattern near the 67,000 area. The immediate support of Nikkei at 63,700 was hit. The recent rebound on Tuesday developed from this support area.

A break below 63,700 will push the Nikkei 225 towards the strong support region of the 60,000 to 62,000 level. The ascending channel pattern defines this support zone. A break below 60,000 will open the door for further downside.

A break above 67,000 is required to push the Nikkei 225 towards the 70,000 level. The RSI indicator also shows that the rebound in Nikkei 225 came from the mid-level. This indicates that the recent support at 63,700 is also important. But higher yields and the broader chip correction keep the upside limited in the Nikkei 225 in the short term.

Despite this correction in Nikkei in June, the overall long-term structure remains bullish. Nikkei gained 11.29% in May. Now, this is just the first few days of June, where the correction has developed. This type of correction after 11.29% of rally in previous month is normal.

Therefore, if the 60,000 level holds, it may introduce another buying pressure in the Nikkei 225 in the latter part of June. But there is still a risk of a deeper correction towards the 50,000 area due to the extremely overbought level seen by the RSI on the monthly chart.

Despite the overbought conditions, the Nikkei 225 shows the strong bullish momentum.

SoftBank Correction Adds Pressure to the Nikkei 225

The strong drop in SoftBank from 9,000 has pushed the stock towards the first support of 6,800. A break below this level will likely push SoftBank towards the 5,000 level.

This drop in SoftBank may push the Nikkei towards the 62,000 area. But the overall bullish structure in SoftBank also points to a strong healthy rally in Nikkei 225.

Bottom Line

Nikkei 225 remains in a short-term correction, but the long-term trend remains bullish. The index rebounded from the first support of 63,700 which suggests a recovery. But elevated bond yields, the risk of the Fed’s rate hike and uncertainty about the oil market and intervention fears of the yen may cap the upside for the time being. If the index breaks the 63,700 level, it might head towards the 60,000 to 62,000 support area. A break below 60,000 may raise the risk of deeper correction. As long as the 60,000 holds, the index will likely trend higher again towards 70,000.

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