[Fundamental viewpoint]
Stock indexes rose for the week as the May jobs report showed a resilient labor market and undue concern over worsening employment receded.
Weekly change NY Dow: +1.17%, NASDAQ: +2.18%, S&P 500: +1.50%.
On the other hand, medium- to long-term
risks include concerns about a prolonged conflict in Ukraine, tariff policies
of the U.S. administration, 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. Furthermore, 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 3.86 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 22.5 and the Nikkei 225's P/E ratio of 15.5 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 3.86 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 38.6 Or, the Nikkei 225 will be around 93,880 yen.
As a result, the Japanese market is undervalued by about 56,140 yen in the medium to long term.
Fundamentally, the Japanese market can be said to be about 56,140 less attractive than the US market. Weakness in the Japanese market was somewhat 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 the clouds on the Ichimoku Chart. The weekly leg of the NASDAQ was positive. The daily is above the 200-day line and the clouds of the Ichimoku Chart. This week, the focus will be on whether the NY Dow can keep above the 200-day line..
② As a result of the earnings announcements, the expected ROE of the Nikkei 225 stocks was +9.1%, a deterioration of -0.1 percentage points compared to three months ago. Profit growth came in at -4.0%, a deterioration of -10.5 percentage points compared to three months ago.
③ Although U.S. long-term interest rates declined, the interest rate differential between the U.S. and Japan widened from 2.92 to 2.95 and the dollar moved toward a weaker yen in the range of ¥142 to ¥145. The dollar index fell -0.24% for 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 fifth week of May was overbought, the first week of June was likely overbought, and overbought is expected this week. Of the five points, ① and ③ were bullish last week.
[Technical viewpoint]
From a technical perspective, the Japanese market is undervalued by 5.6 points in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ (about 2,110 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is undervalued by 1.0 point in the medium to long term (about 380 yen when converted to the Nikkei 225).
Japanese markets remain weak against the NY Dow and NASDAQ. The VIX, a measure of U.S. market volatility, declined to a weekly low of 16.8. The Nikkei VI fell to a weekly low of 23.4. The U.S. market is somewhat optimistic, while the Japanese market is “skeptical..
The Nikkei 225 is below the 9-day line but above the 25-day line. The short-term trend is now showing a “yellow signal.
The Nikkei 225 is above the Ichimoku Kinko's Kumo (equilibrium) cloud. Since the two factors are positive, the medium-term trend is also “yellowing”.
In the US market, the NY Dow is above the 9-day line and 25-day and 200-day lines. It is above the clouds of the Ichimoku chart.
The NASDAQ is above the 9-day line and 25-day and 200-day lines. It is above the clouds above the Ichimoku Chart.
It is a ‘green 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 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 no trend and a short-term no trend. The Japanese market is in a medium-term no trend, and the short-term is no 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 143 and 146 yen.
Investors will be watching the U.S. markets this week to see how the widening rift between President Trump and Elon Musk will play out, in addition to the continued uncertainty surrounding the U.S. tariff negotiations. Economic indicators to watch include CPI and PPI, as well as the University of Michigan's Consumer Confidence Index. Globally, the focus will be on China's consumer and producer prices and trade statistics, German producer prices, and U.K. employment and industrial production.
Last week, the Nikkei 225 remained within the expected range. The upper price was below ¥660 and the lower price was above ¥80.
This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently around 38420 yen) on the upside and the 25-day line (currently around 37510 yen) on the downside.
It will be interesting to see if the Nikkei 225 will continue to rise above its May 13 high (38494 yen) or fall below its May 22 low (36856 yen) this week.
