[Fundamental viewpoint]
Last week in the U.S. markets, reports that Iran’s new Supreme Leader, Ayatollah Mojtaba Khamenei, had stated that the blockade of the Strait of Hormuz would continue caused crude oil prices to surge again, leading to a weekly decline in stock indices.
Weekly percentage change: Dow Jones: -1.99%, NASDAQ: -1.26%, S&P 500: -1.60%.
On the other hand, medium- to long-term
risks include concerns over military conflict in the Middle East and the prolonged
Ukraine conflict, financial instability and worries about a global economic
slowdown stemming from the U.S. administration's tariff policies and rising
interest rates, as well as fears of a real estate bubble bursting and China's
economic slowdown. Consequently, there are also concerns about the arrival of
stagflation. Furthermore, continued attention is required regarding
geopolitical risks in Latin America and East Asia.
The difference in the yield spread between the Japanese and U.S. markets is 0.83 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 21.2 and the Nikkei 225's P/E ratio of 19.2 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 0.83 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 22.8 Or, the Nikkei 225 will be around 64,030 yen.
As a result, the Japanese market is undervalued by about 10,210 yen in the medium to long term.
Fundamentally speaking, the Japanese market is about ¥10,210 less attractive than the U.S. market. Last week, 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 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 below the 200-day line and the clouds on the Ichimoku Chart. The weekly leg of the NASDAQ was negative. The daily is a below the 200-day line and the clouds on the Ichimoku Chart. This week, the focus will be on whether the NASDAQ can return above the 200-day line.
② Following the earnings announcements, the projected ROE for Nikkei 225 constituents reached +8.7%. This represents a 0.1 percentage point improvement compared to three months ago. The profit growth rate stood at -1.4%, marking a 3.7 percentage point improvement compared to three months ago.
③ Long-term U.S. interest rates rose, widening the interest rate differential between Japan and the U.S. from 1.98 to 2.04. As a result, the dollar-yen exchange rate moved toward a weaker yen, fluctuating between the 157 and 159 yen ranges. The Dollar Index rose by 1.66% over the week.
④ The OECD's nominal GDP growth rate for Japan and the U.S. in 2026 is expected to be +3.2% for Japan and +4.9% for the U.S., so the Japanese market is 1.7 percentage points inferior in this aspect.
⑤ It is highly likely that there was a net buying position in the first week of March and a net selling position in the second week of March, and a net selling position is expected this week. Last week, out of the five points, point ① was a bearish factor.
[Technical viewpoint]
From a technical perspective, the Japanese market is overvalued by 14.1 percentage points (equivalent to approximately ¥7,590 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 14.9 percentage points (equivalent to approximately ¥8,020 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 performing better than the Dow Jones and NASDAQ. The VIX, an indicator of volatility in the U.S. market, fell to 27.2 for the week. The Nikkei VI rose to 45.8 for the week. The U.S. market is in a state of “fear,” while the Japanese market is in a state of “extreme fear.”
The Nikkei Average is below the 9-day and 25-day moving averages. A “red 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 +12.2%, and the deviation rate from the 200-day moving average is +14.9%. With all three factors positive, a “green light” is lit for the medium-term trend.
In the US market, the NY Dow is below the 9-day line and 25-day and 200-day lines. It is below the clouds of the Ichimoku chart.
The NASDAQ is below the 9-day line and 25-day and 200-day lines. It is below the clouds the Ichimoku Chart.
It is a ‘red light’ in the short term and a ‘red light’ in the medium term.
[Outlook for this week]
In the U.S. market, concerns about an economic downturn driven by the prolonged conflict in the Middle East and high oil prices are likely to be the primary focus for the time being.
Looking at the technical aspects, the U.S. market is in a medium-term down trend and a short-term down trend. The Japanese market is in a medium-term up trend, and the short-term is down 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 158 and 161 yen per dollar range.
In the U.S. markets this week, the war in the Middle East and its impact on energy supplies will continue to influence global markets and affect a series of policy rate decisions by major central banks. As for economic indicators, the U.S. Producer Price Index (PPI) and industrial production, the eurozone trade balance, the U.K. unemployment rate, and China’s industrial production, retail sales, and unemployment rate are all scheduled for release.
Last week, the Nikkei Average temporarily dipped below the expected range. The upper limit was breached by 470 yen, and the lower limit by 990 yen.
This week, the Nikkei Average is expected to move within a range defined by the upper limit at the -1σ Bollinger Band (currently around 54,490 yen) and the lower limit at the -3σ Bollinger Band (currently 51,080 yen).
The Nikkei Average is likely to remain volatile this week as well, driven by developments in the Middle East and oil prices; however, unless concerns about a prolonged conflict are alleviated, selling pressure is expected to persist.
