Outlook for the Nikkei average this week [6 May 2025]

 [Fundamental viewpoint]

In the US markets last week, stock indices rose for the week on expectations that US-China talks are progressing and that US-China trade frictions are easing, as well as generally strong economic releases.

Weekly change NY Dow: +3.00%, NASDAQ: +3.42%, S&P 500: +2.92.

                                                                                                 

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 3.85 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 21.1 and the Nikkei 225's P/E ratio of 15.1 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 3.85 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 36.0 Or, the Nikkei 225 will be around 87,910 yen.

As a result, the Japanese market is undervalued by about 51,080 yen in the medium to long term.

 

Fundamentally, the Japanese market can be said to be about 51,080 yen less attractive than the US market. Weakness in the Japanese market has been magnified.

 

[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 positive last week. The daily is below the 200-day line and below the clouds on the Ichimoku Chart. The weekly leg of the NASDAQ was positive. The daily is below the 200-day line and below 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 200-day line.

②    As a result of the earnings announcements, the expected ROE of the Nikkei 225 stocks was +9.2%, the same level as three months ago. The profit growth rate was +5.2%, an improvement of +2.6 percentage points compared to three months ago.

③    Although long-term interest rates in the US rose and the interest rate differential between the two countries widened from 2.91 to 3.06, the dollar moved towards a stronger yen in the range of ¥144 to ¥143. The Dollar Index fell -0.23% 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 fourth week of April was overbought, the fifth week of April was likely overbought and this week is expected to be overbought. Of the five points, ① was bullish last week.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is undervalued by 1.0 point in the medium to long term in terms of the difference in 200-day divergence from the NASDAQ (about 370 yen in terms of the Nikkei 225). On the other hand, the difference in 200-day divergence from the NYDow is undervalued by 0.8 points in the medium to long term (about 290 yen in terms of the Nikkei 225).

 

Japanese markets are weak against the NY Dow and NASDAQ. The VIX, a measure of US market volatility, fell to a weekly low of 24.4. The Nikkei VI fell to a weekly low of 27.1. Both the US and Japanese markets are in a state of ‘doubt’...

 

The Nikkei 225 is above the 9-day and 25-day lines. The short-term trend has a "green light".

The Nikkei 225 is below the equilibrium cloud. The overall divergence is +2.2% and the divergence from the 200-day moving average is -3.1%. As these two factors are negative, a "yellow signal" is lit for the medium-term trend.

In the US market, the NY Dow is above the 9-day line and 25-day and below 200-day lines. It is below the clouds of the equilibrium chart.

The NASDAQ is above the 9-day line and 25-day and below 200-day lines. It is below the clouds on the Ichimoku Chart.

This is a ‘green light’ in the short term and a ‘red light’ in the medium term.

 

[Outlook for this week]

Looking at the US market from a fundamental perspective, recessionary fears are amplified in the near-term. Other risk factors include inflation and rising interest rates due to the Russia-Ukraine war, recession due to energy shortages and deteriorating political conditions in the EU bloc, US-China trade friction, financial market turmoil caused by the bursting of China's property 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 down trend and a short-term up 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 between 144 and 142 yen.

 

This week's US markets will be focused on potential tariff negotiations between the US and China, the Fed's interest rate decision and subsequent statements from Fed officials, and a string of Q1 earnings reports. There will also be important data releases, including the ISM Services PMI and trade statistics. Globally, the UK monetary policy decision, German manufacturing orders and industrial production, and China's services PMI and new yuan-denominated loans will be in focus.

 

Last week, the Nikkei 225 remained within the expected range. The upper price was below ¥510 and the lower price was above ¥910.

This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ + ¥800 (currently around ¥38290) on the upside and Bollinger Band +2σ - ¥800 (currently around ¥36890) on the downside.

             

This week will be a week to see if the Nikkei 225 can move into line with the +2σ Bollinger band or be allowed to bounce back.