Nikkei 225 Outlook: Negative sentiment overshadows positive fundamentals

• Nikkei 225 broke below its 200-day moving average and a four-month range configuration.
• US President Trump’s trade war 2.0 against major trading partners triggered a negative feedback loop in Japanese equities due to potential disruption in semiconductor supply chains.
• Positive fundamentals in the Japanese economy are likely to support the major uptrend phase of the Nikkei 225.
• In the medium-term, negative sentiment may take a foothold in the Nikkei 225 with a risk of further corrective decline below 38,520 key medium-term resistance.

Last week, the Japanese benchmark stock index, Nikkei 225, broke below its four-month range support of 37,810 and recorded a weekly loss of 4.2%, its worst performance since early September 2024.

The recent dismal performance of Japanese equities has been driven by negative sentiment towards US President Trump’s upcoming tariffs threat to impose 25% duties on Canadian and Mexican goods as well as an extra 10% levy on Chinese imports with effect from Tuesday, 4 March.

Fig 1:  Citigroup Japan Economic Surprise Index as of 28 Feb 2025 (Source: MacroMicro, click to enlarge chart)

In contrast, several key leading economic indicators of the Japanese economy have exceeded expectations in December and January, such as wage growth, services PMI, inflation trend, and household spending.

The Citigroup Japan Economic Surprise Index can be used as a leading gauge to track the improvements of key economic data, which is the sum of the difference between the actual value of various data and their consensus forecast. If the index value is more than zero, it suggests that the overall economic condition in Japan is generally better than expected, and vice versa when the Index value falls below zero.

The Citigroup Japan Economic Surprise Index has trended upward steadily in the past two months since hitting a trough on 6 December 2024, with a value of -52.20 to 34.40 as of 28 February, its highest level in ten months. The upward trend represents an improvement in economic growth in Japan (see Fig 1).

Fig 2:  52-week average net purchases of Japanese equities from various types of market participants as of 14 Feb 2025 (Source: MacroMicro, click to enlarge chart)

Based on data from the Tokyo and Nagoya stock exchanges, the 52-week average of net purchases of Japanese stocks from foreign investors has fallen significantly since early December 2024 to a net sold amount of -44,911,557 as of 14 February (see Fig 2).

On the flip side, the decrease in net purchases from foreign investors is offset by an increase in net purchases from institutional investors (from 16,088,440 to 75,474,988) and retail/individual investors (from -36,338,830 to 5,074,648).

Fig 3:  Nikkei 225 medium-term & major trends as of 4 Mar 2025 (Source: MacroMicro, click to enlarge chart)

The price actions of the Nikkei 225 are not moving in a similar positive trend of the improved fundamentals of the Japanese economy but instead moving in tandem with sentiment factors that have turned bearish since last Tuesday, 25 February.

The Nikkei 225 has broken below its 200-day moving average, now acting as key medium-term pivotal resistance at 38,520. In addition, the condition of the daily RSI momentum indicator remains bearish as it has not hit its oversold level (see Fig 3).

In the lens of the technical analysis, the Nikkei 225 has staged a medium-term bearish breakdown from a prior four-month range configuration that was in place since late September 2024.

Further potential weakness may be in store to expose the next medium-term supports at 35,250 and 33,740/340 (also the lower boundary of the long-term secular ascending channel from March 2020 low).

However, a clearance above 38,520 invalidates the bearish scenario for a retest at the 40,060 medium-term range resistance.