[Fundamental viewpoint]
In the US markets last week, stock indices fell over the week on concerns about deteriorating economic indicators and the negative impact of the Trump administration's tariff policies on the US economy.
Weekly change NY Dow: -2.51%, NASDAQ: -2.51%, S&P 500: -1.66%.
On the other hand, medium- to long-term
risks include concerns about the prolonged conflict in Ukraine, energy costs,
financial instability and global economic slowdown due to rising interest
rates, and the collapse of the real estate bubble and economic slowdown in
China. This also raises concerns about the arrival of stagflation. In addition,
geopolitical risks in East Asia and the Middle East continue to require
attention.
The difference in the yield spread between the Japanese and U.S. markets is 4.06 points undervalued for the Japanese market when the OECD's nominal GDP forecast for 2025 is taken into account. The reason for the undervaluation is the difference between the S&P 500's P/E ratio of 22.6 and the Nikkei 225's P/E ratio of 15.2 the difference between the U.S. and Japanese interest rates, and the difference in GDP growth rates.
In order for the U.S. and Japanese markets to be in equilibrium, the following conditions must be met.
The difference in GDP growth between Japan and the U.S. in 2025 relative to the current price of the Nikkei 225 will be 4.06 percentage points larger than the OECD forecast. (Japan is revised downward or the U.S. is revised upward). Or the current year's forecast PER for stocks in the Nikkei Stock Average becomes about 39.7 Or, the Nikkei 225 will be around 101,280 yen.
As a result, the Japanese market is undervalued by about 62,510 yen in the medium to long term.
Fundamentally, the Japanese market can be said to be about 62,510 yen less attractive than the US market. Weakness in the Japanese market narrowed last week.
[Conditions for Nikkei average rise]
In the future, the following assumptions are necessary for the Nikkei average to rise further.
① Rising US market
② Increase in profit forecast for the current fiscal year above the previous year's level
③ Further depreciation of the yen due to the widening interest rate gap between Japan and the U.S.
④ Upward revision of Japan's 2025 GDP estimate (now +3.3%) by OECD
⑤ Foreign investors over-buying
Looking at recent movements
① The weekly leg of the NYDow was negative last week. The daily is above the 200-day line and above the clouds on the Ichimoku Chart. The weekly leg of the NASDAQ was negative. The daily is above the 200-day line and in the clouds of the Ichimoku Chart. This week, the focus will be on whether or not the NY Dow is able to return above the 25-day line.
② As a result of the earnings announcements, the forecasted ROE of the Nikkei 225 index stood at +9.2%, an improvement of +0.1 percentage points compared to three months ago. The profit growth rate was +6.8%, an improvement of +4.8 percentage points compared to three months ago.
③ Although long-term interest rates in the US fell and the interest rate differential between the two countries narrowed from 3.13 to 3.01, the dollar moved towards a stronger yen in the range of ¥152 to ¥148. The Dollar Index fell -0.14% on the week.
④ The OECD's nominal GDP growth rate for Japan and the U.S. in 2025 is expected to be +3.3% for Japan and +4.4% for the U.S., so the Japanese market is 1.1 percentage points inferior in this aspect.
⑤ The second week of February was likely to have been overbought, the third week of February was likely to have been oversold and this week is expected to be overbought. Of the five points, ① and ③ were bearish last week.
[Technical viewpoint]
Looking at the Japanese market from a technical perspective, it is undervalued by 5.8 points in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ (about 2250 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is undervalued by 3.5 points in the medium to long term (about 1360 yen when calculated for the Nikkei 225).
Japanese markets remain weak against the NY Dow and NASDAQ. The VIX, a measure of US market volatility, rose to 18.2 for the week. The Nikkei VI fell to 20.8 for the week. The US market and the Japanese market is somewhat volatile.
The Nikkei 225 is below the 9-day and 25-day lines. The short-term trend has a ‘red light’.
The Nikkei 225 is below the clouds of the equilibrium chart. The overall divergence is +0.3% and the divergence from the 200-day moving average is +0.3%. As these two factors are nrgative, a ‘yellow signal’ is lit for the medium-term trend.
In the US market, the NY Dow is below the 9-day and above 25-day and 200-day lines. It is also above the clouds of the equilibrium chart.
The NASDAQ is above the 9-day, and 25-day , 200-day lines. It is above the clouds on the Ichimoku Chart.
This is a ‘yellow light’ in the short term and a ‘green light’ in the medium term.
[Outlook for this week]
Looking at the US market from a fundamental perspective, recessionary fears are receding in the near-term. Other risk factors include inflation and rising interest rates due to the Russia-Ukraine war, economic recession due to energy shortages and deteriorating political conditions in the EU, U.S.-China trade friction, financial market turmoil caused by the bursting of China's real estate bubble and credit crunch, and expanding geopolitical risks in the Middle East.
Looking at the technical aspects, the U.S. market is in a medium-term up trend and a short-term no trend. The Japanese market is in a medium-term no trend, and the short-term is up trend.
Analysis of the foreign exchange market shows that the yen has turned stronger since topping out at 156 yen, which was reached in January 2025. This week, the yen is expected to be in the 150-147 range.
This week, US markets will focus on speeches by several senior Fed officials, along with key economic data such as personal income and expenditure, PCE price index, durable goods orders, revised Q4 GDP growth and CB consumer sentiment. In the housing sector, the S&P/Case-Shiller house price index and new and pending home sales will be in focus. Globally, the releases will include French and Italian inflation, Indian GDP growth, German inflation and the Ifo business climate index, and retail sales.
Last week, the Nikkei 225 fell below its expected range. The upside was below ¥470 and the downside was below ¥280.
This week, the Nikkei 225 is expected to move between the 25-day line (currently around JPY 39140) on the upside and Bollinger Band -3σ (currently around JPY 37930) on the downside.
The Nikkei 225 is likely to be affected by President Trump's policies and recession fears again this week, but the Nikkei 225 is likely to face a critical moment to see whether or not it will hold up and move away from the lower end of the market.
