Outlook for the Nikkei average this week [19 October 2025]

 [Fundamental viewpoint]

Last week on US markets, although there were periods of decline amid concerns over US-China trade tensions and regional bank credit worries, caution eased for the time being following President Trump's remarks and resilient regional bank earnings reports. Consequently, stock indices rose over the week.

Weekly change rate: NY Dow: +1.56%, NASDAQ: +2.14%, S&P 500: +1.70%.

                                                                                                 

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 1.76 points undervalued for the Japanese market when the OECD's nominal GDP forecast for 2026 is taken into account. The reason for the undervaluation is the difference between the S&P 500's P/E ratio of 23.0 and the Nikkei 225's P/E ratio of 18.3 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 2026 relative to the current price of the Nikkei 225 will be 1.76 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 27.0 Or, the Nikkei 225 will be around 70,230 yen.

As a result, the Japanese market is undervalued by about 22,650 yen in the medium to long term.

 

From a fundamental perspective, the Japanese market could be said to be approximately ¥22,650 less attractive than the US market. Last week, the weakness in the Japanese market intensified.

 

[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 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 return above the 25-day line.

②    As a result of the financial results announcement, the ROE forecast for Nikkei 225 stocks was +8.9%. This is a deterioration of 0.2 percentage points compared to three months ago. Profit growth was -6.9%. This is a deterioration of 3.6 percentage points compared to three months ago.

③    Although US long-term interest rates declined, the interest rate differential between Japan and the US widened from 2.36 to 2.39. Consequently, the dollar-yen exchange rate moved towards a stronger yen, fluctuating within the range of 152 to 149 yen per dollar. The dollar index fell by -0.32% over the week.

④    The OECD's nominal GDP growth rate for Japan and the U.S. in 2026 is expected to be +2.5% for Japan and +4.3% for the U.S., so the Japanese market is 1.8 percentage points inferior in this aspect.

⑤    The second week of October saw net buying, the third week of October likely saw net buying, and net buying is expected this week. Last week, out of the five points, ⑤ was the bullish factor.

 

[Technical viewpoint]

From a technical perspective, the Japanese market is overvalued by 5.5 percentage points (equivalent to approximately ¥2620 for the Nikkei average) relative to the NASDAQ's 200-day moving average deviation rate on a medium-to-long-term basis. Conversely, it is overvalued by 13.9 percentage points (equivalent to approximately ¥6610 for the Nikkei average) relative to the NY Dow's 200-day moving average deviation rate over the same timeframe.

 

The Japanese market is showing greater strength than the NY Dow and NASDAQ. The VIX, an indicator of volatility in the US market, fell to 20.8 on a weekly basis. The Nikkei VI rose to 35.5 on a weekly basis. The US market is in a state of “mood of suspicion”, while the Japanese market is in a state of “height phobia”.

 

The Nikkei 225 is below the 9-day line and above 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 +34.2%, while the 200-day moving average divergence was +20.1%. 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 25-day and above 200-day lines. It is above the clouds of the Ichimoku chart.

The NASDAQ is below the 9-day line and above 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 no trend.

 

Analysis of the foreign exchange market indicates that the yen has shifted towards depreciation, with the low of 139 yen reached in April 2025 marking the bottom. This week, the yen is expected to trade between the 149 and 152 yen per dollar range.

 

This week in the US markets, investors will continue to monitor developments in the US-China trade dispute. The US corporate earnings season is also in full swing, with major companies such as Tesla, P&G, GE, Coca-Cola, Netflix, IBM, AT&T, Verizon and Intel scheduled to report their results. The US federal government shutdown is expected to enter its fourth week, though traders will also focus on the Consumer Price Index (CPI), S&P Global PMI, and existing home sales figures. Globally, releases include China's third-quarter GDP, retail sales, industrial production, PMIs for the Eurozone, Germany, and the UK, alongside Japan's PMI, trade statistics, and price data.

 

Last week, the Nikkei average significantly exceeded its projected range. The upper limit surpassed 950 yen, while the lower limit exceeded 4,040 yen.

This week, the Nikkei average is projected to move within a range defined by the upper limit at the Bollinger Band +2σ (currently around 48,930 yen) and the lower limit at the 25-day moving average (currently around 46,050 yen).

             

This week's Nikkei average is expected to be influenced more by movements in the US market—such as US-China trade friction, the US government shutdown, and concerns over regional bank credit—than by domestic factors. Until this uncertainty dissipates, the upward momentum is likely to be dampened.