[Fundamental viewpoint]
Last week on the US markets, although August's employment figures indicated a further slowdown in the labour market, technology stocks saw periods of growth, resulting in mixed weekly performance for the major indices.
Weekly change: Dow Jones: -0.32%, NASDAQ: +1.14%, S&P 500: +0.33%.
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 2.88 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 24.2 and the Nikkei 225's P/E ratio of 17.8 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 2.88 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 36.5 Or, the Nikkei 225 will be around 88,220 yen.
As a result, the Japanese market is undervalued by about 45,200 yen in the medium to long term.
Fundamentally speaking, the Japanese market is arguably less attractive than the US market by around ¥45,200. Last week, the weakness in the Japanese market intensified. The weakness in the Japanese market has diminished.
[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 positive. The daily is above the 200-day line and above the clouds on the Ichimoku Chart. This week, the focus will be on whether the NY Dow can keep above the 25-day line.
② As a result of the financial results announcement, the ROE forecast for Nikkei 225 stocks was +8.8%. This is a deterioration of 0.2 percentage points compared to three months ago. Profit growth was -6.6%. This is a deterioration of 2.7 percentage points compared to three months ago.
③ US long-term interest rates declined, and although the interest rate differential between Japan and the US narrowed from 2.62 to 2.50, the dollar-yen exchange rate moved slightly in a weaker yen direction within the range of the 146-yen to 149-yen levels. The dollar index fell by -0.12% over 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 August saw net selling, while the first week of September likely saw net buying; net selling is anticipated this week. Last week, out of the five points, ① was the bullish factor.
[Technical viewpoint]
From a technical perspective, the Japanese market is undervalued by 0.8 points in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ (about 340 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is overvalued by 5.8 point in the medium to long term (about2500 yen when converted to the Nikkei 225).
The Japanese market is stronger than the Dow Jones Industrial Average but weaker than the NASDAQ. The VIX, an indicator of volatility in the US market, fell to 15.2 on a weekly basis. The Nikkei VI rose to 24.3 on a weekly basis. The US market is optimistic, while the Japanese market is in a state of “mood of suspicion”.
The Nikkei 225 is above the 9-day line and the 25-day line. The short-term trend is now showing a “green signal.
The Nikkei 225 is above the Ichimoku Kinko's Kumo (equilibrium) cloud. The overall divergence was +20.0%, while the 200-day moving average divergence was +11.2%. As all three factors are positive, the medium-term trend has a "green light".
In the US market, the NY Dow is below the 9-day line and above 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 ‘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, concerns about an economic downturn remain in the short 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 up trend and a short-term no trend. The Japanese market is in a medium-term up 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 148 and 146 yen.
This week, US markets will continue to focus on interest rate expectations. Among economic indicators, the Consumer Price Index (CPI) and Producer Price Index (PPI) will be closely watched. The University of Michigan Consumer Sentiment Index will also be noted as a leading indicator. Globally, the ECB will announce its policy rate and macroeconomic outlook, alongside industrial production figures from Germany, France and the UK, and inflation statistics from China.
Last week, the Nikkei average traded within its expected range. The upper limit was 30 yen below, while the lower limit was 690 yen above.
This week, the Nikkei average is expected to move within a range defined by the upper limit at the Bollinger Band +2σ (currently around 44,170 yen) and the lower limit at the 25-day moving average (currently around 42,320 yen).
This week, the Nikkei average looks set to challenge the record high of ¥43,876 reached on 19 August.
