JPN225 Drops to Correction Levels Ahead of the BOJ

26 Tem

The Japanese benchmark index is having another banner year, which culminated to July’s record peak. The central bank’s accommodative stance despite the policy pivot and the Yen’s protracted slump, were the key drivers. But even if slowly, the Bank of Japan is moving towards a less loose setting, after exiting negative rates regime in a historic decision in March. Policymakers have pointed to less bond buying ahead and there are mounting expectations that policymakers will hike again next week.

These prospects help the ailing Yen rebound (along with intervention speculation) and send the JPN225 to correction territory, with a more than 10% slide for the all-time highs. This threatens the pivotal 200Days EMA (blue line) and a breach would open the door to bigger losses towards and beyond 35,771.

However, there is ambivalence around the timing of the next rate increase, while officials have disappointed hawkish expectation in the past and have wrong-footed markets before. Furthermore, the Yen’s demise has made Japanese equities more appealing to foreign investors and ultra-loose monetary policies may have been key drivers of the rally in Japanese equities, but they are not the only culprits. Structural reforms, favorable policies by the government and strong corporate earnings are among the supportive factors.

Furthermore the drop is stretched from a technical perspective, as the RSI reached the most oversold in years. This can help JPN225 stage a comeback as it already defends the 200Days EMA. It may get the opportunity to reclaim the EMA200 (black line) at around the 40K mark. Successful effort would reinstate the bullish bias, but strong catalyst would be needed.


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