The Nikkei 225 index has remained under pressure this year and continued to underperform its global peers like the German DAX and French CAC 40. It retreated to a low of ￥36,897 on Friday, its lowest level since September 19. It has fallen by almost 10% from its highest level this year. Here are the two main reasons why the Nikkei 225 index has plunged.
Bank of Japan hikes and Japan bond yields
The main reason why the Nikkei 225 index has crashed is that the Bank of Japan has become the most hawkish central bank in the market this year. It has hiked interest rates by 0.25%, and the recent inflation numbers point to further hikes ahead.
The BoJ’s actions differ from those of other central banks. For example, the European Central Bank (ECB) slashed interest rates for the fifth consecutive meeting and hinted that more hikes were coming.
The Federal Reserve has slashed rates three times and hinted that it would deliver two more this year. Analysts anticipate that the bank will cut rates three times as the US economy slows because of Donald Trump’s tariffs.
The hawkish view of the BoJ has led to a sharp increase in Japanese government bond yields. The 10-year yield has jumped to 1.5% from minus 0.186% in 2020. Also, the five-year yield rose to 1.1% from minus 0.324% in 2020.
These numbers mean that many people in Japan have rotated from stocks to the bond market, where the yield has continued rising. This trend has led to higher inflows into Japan’s money market funds.
Donald Trump’s tariffs
The Nikkei 225 index has crashed because of the ongoing trade war between the US and some of its allies. Trump has already implemented tariffs on Chinese, Mexican, and Canadian goods this year.
He has also hinted that he will implement more on other top trading partners. One of his approaches will be to implement reciprocal tariffs on other countries. Japan may be affected because it still has a trade deficit with the US.
However, Japan may benefit from Trump’s reciprocal tariffs because it has low levies on the US. For example, Japan does not have any tariffs on imported cars, while the US has a 2.5% levy on passenger cars and 25% on light trucks.
Nonetheless, the ongoing trade war will impact the country since the company specializes on exports. These tariffs will have an impact on demand for its products.
Most Nikkei 225 index have retreated this year. Some of the top gainers are firms like Mervari, Bandai Namco, M3, LY, Sumitomo Pharma, Kawasaki Heavy, and Kobe Steel.
Nikkei 225 index analysis
Nikkei 225 index chart by TradingView
The daily chart shows that the Nikkei 225 index found a strong barrier at ￥40,000, where it failed to move above several times since September last year. It has now dropped below the key support at ￥37,795.
The index has crashed below the 50-day and 100-day Weighted Exponential Moving Averages (WMA). Also, the Relative Strength Index (RSI) and the MACD indicators have pointed downwards.
Therefore, the index will likely continue falling as sellers target the psychological point at ￥36,000. A drop below that point will signal further downside to ￥35,216, its lowest level in September last year.
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