Outlook for the Nikkei average this week [18 January 2026]

 [Fundamental viewpoint]

Last week in the U.S. market, stock indices fell over the week as investors shunned uncertainty stemming from the worsening situation in Iran, the criminal investigation into Fed Chairman Powell, and issues surrounding credit card fee restrictions.

Weekly change: NY Dow: -0.29%, NASDAQ: -0.66%, S&P 500: -0.38%.

                                                                                                 

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 Latin America and East Asia, the Middle East continue to require attention..

The difference in the yield spread between the Japanese and U.S. markets is 0.82 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 20.4 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 0.82 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 24.4 Or, the Nikkei 225 will be around 64,670 yen.

As a result, the Japanese market is undervalued by about 10,730 yen in the medium to long term.

 

From a fundamental perspective, the Japanese market could be said to be approximately 10,730yen less attractive than the US market. Last week, the weakness in the Japanese market 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 2026 GDP estimate (now +2.5%) 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 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    Following the earnings announcements, the projected ROE for Nikkei 225 constituents stands at +8.9%. This is unchanged from three months ago. The profit growth rate is -3.1%, an improvement of +3.5 percentage points compared to three months ago.

③    Although U.S. long-term interest rates rose, the interest rate differential between Japan and the U.S. narrowed from 2.09 to 2.05. The dollar-yen exchange rate fluctuated within the range of 157 to 159 yen. The dollar index rose +0.24% for 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 first week of January saw net buying, the second week 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 14.8 percentage points (equivalent to approximately ¥7,980 for the Nikkei 225) relative to the NASDAQ's 200-day moving average deviation rate on a medium-to-long-term basis. Meanwhile, it is overvalued by 15.4 percentage points (equivalent to approximately ¥8,310 for the Nikkei 225) relative to the NY Dow's 200-day moving average deviation rate on a medium-to-long-term basis.

 

The Japanese market is stronger than the NY Dow and NASDAQ. The VIX, an indicator of volatility in the U.S. market, rose to 15.9 on a weekly basis. The Nikkei VI rose to 30.0 on a weekly basis. The U.S. market is in an “optimistic” state, while the Japanese market is in a “fear of heights” state.

 

The Nikkei Average is above both the 9-day and 25-day moving averages. A “green light” is lit for the short-term trend.

The Nikkei Average is above the cloud in the Ichimoku Kinko Hyo chart. The overall deviation rate is +39.0%, and the deviation rate from the 200-day moving average is +25.0%. With all three factors positive, a “green light” is lit for the medium-term trend.

 

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

It is a ‘yellow light’ in the short term and a ‘green light’ in the medium term.

 

[Outlook for this week]

In the U.S. market, key immediate concerns are expected to include the frequency of interest rate cuts by the Federal Reserve this year, the Supreme Court's ruling on the constitutionality of Trump tariffs, and the market impact of advancing protectionist policies.

 

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 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 156 and 158 yen per dollar range.

 

This week in the U.S. market, focus will be on personal income and spending (including the PCE price index) and the revised third-quarter GDP figures. Other leading indicators scheduled for release include the S&P Purchasing Managers' Index (PMI) and the University of Michigan Consumer Sentiment Survey. Earnings reports are expected from Netflix, 3M, Johnson & Johnson, Visa, Intel, Procter & Gamble, and NextEra Energy.

Globally, the Eurozone, UK, and Japan will release their PMIs. The UK will report inflation, unemployment, and retail sales figures. China will release its final annual GDP figures. The Bank of Japan will also announce its monetary policy decision.

 

Last week, the Nikkei average exceeded its projected range. The upper limit surpassed the range by 110 yen, while the lower limit exceeded it by 1,030 yen.

This week, the Nikkei average is expected to move within a projected range defined by the upper limit at the Bollinger Band +2σ (currently around 54,110 yen) and the lower limit at the Bollinger Band +1σ (currently 52,620 yen).

             

This week, the Nikkei average is likely to remain range-bound, even after its sharp rise, until the U.S. market confirms its upward trend.