JPN225 has backed off its March record peak, as the central bank made a historic exit from negative rates, shifting away from the ultra-loose stance that has devalued the Yen and has boosted equities. The BoJ is set to go further down that road and start scaling back its bond buying, while at least one more rate cut this year looks reasonable as officials expect underlying inflation to increase gradually. These prospects could weigh further on the index and sent it back towards this year’s low (36,732), but the downside appear unfriendly with the 200Days EMA following (blue line).
Despite the pullback, JPN225 shows resiliency, as the Bank of Japan maintains an accommodative stance and the lack of clarity around its intentions to reduce the asset purchases cast doubts over the policy normalization process. Today’s mixed inflation data added to the uncertainty, as core CPI rose but less than expected and core-core dropped for ninth straight month.
Furthermore, the stock market’s strength goes beyond easy monetary policy. Structural reforms, strong corporate earnings and market friendly government trying to direct saving into investments provide long-term tailwinds. As such, JPNN225 can resume its advance and push for new all-time highs (41,227). The recent consolidation is likely to persist though, amidst competing drivers.
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