[Fundamental viewpoint]
Last week, U.S. stock indices rose for the week, driven by a memorandum of understanding between the U.S. and Iran aimed at ending hostilities and a decline in crude oil prices.
Weekly percentage change: NY Dow: +0.71%, NASDAQ: +2.43%, S&P 500: +0.93%
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.
Considering the OECD’s nominal GDP forecasts for 2026, the Japanese market is overvalued by 0.31 points relative to the U.S. market. This overvaluation stems from the difference between the S&P 500’s P/E ratio of 22.0 and the projected P/E ratio of 18.7 for the constituent stocks of the Nikkei 225 for the current fiscal year, as well as the interest rate differential and the difference in GDP growth rates between Japan and the U.S.
For the Japanese and U.S. markets to reach equilibrium, the following conditions must be met:
Compared to the current Nikkei 225 price, the difference in GDP growth rates between Japan and the U.S. in 2026 must narrow by an additional 0.31 percentage points relative to the OECD forecast (either Japan’s forecast must be revised upward or the U.S.’s must be revised downward). Alternatively, the projected P/E ratio for the current fiscal year for Nikkei 225 constituent stocks must reach approximately 17.7. Or, the Nikkei 225 must reach approximately 67,470 yen.
Consequently, the Japanese market is overvalued by about 3,780 yen in the medium to long term.
From a fundamental perspective, one could say that the Japanese market is about 3,780 yen more attractive than the U.S. market. Last week, the strength of the Japanese market increased.
[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 +2.9%) 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 the clouds on the Ichimoku Chart. The weekly leg of the NASDAQ was positive. The daily is a above the 200-day line and the clouds on the Ichimoku Chart. This week, the focus will be on whether the NYDow can keep above the 25-day line.
② Following the release of earnings results, the projected ROE for Nikkei 225 constituent stocks stood at +10.6%. This represents an improvement of +1.9 percentage points compared to three months ago. The profit growth rate was +10.0%, marking an improvement of +11.4 percentage points compared to three months ago.
③ Although U.S. long-term interest rates fell and the interest rate differential between Japan and the U.S. narrowed from 1.85 to 1.81, the dollar-yen exchange rate moved in a direction of yen weakness, ranging from the 159-yen level to the 161-yen level. The Dollar Index rose 0.96% for the week.
④ The OECD's nominal GDP growth rate for Japan and the U.S. in 2026 is expected to be +2.9% for Japan and +5.8% for the U.S., so the Japanese market is 2.9 percentage points inferior in this aspect.
⑤ ⑤ It is highly likely that net selling occurred in the second week of June and net buying in the third week of June, and net buying is expected this week. Last week, out of the five points, ①, ③, and ④ were bullish factors.
[Technical viewpoint]
From a technical perspective, the Japanese market is overvalued by 20.7 percentage points (equivalent to approximately ¥14,750 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 26.1 percentage points (equivalent to approximately ¥18,600 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 16.8 for the week. The Nikkei VI fell to 29.9 for the week. The U.S. market is in a “neutral” state, while the Japanese market is in a “fear” state.
The Nikkei Average is above 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 +60.8%, and the deviation rate from the 200-day moving average is +33.0%. With 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 above the 9-day line and 25-day and 200-day lines. It is above the clouds the Ichimoku Chart.
It is a ‘green light’ in the short term and a ‘green light’ in the medium term.
[Outlook for this week]
In the U.S. market, concerns about an economic downturn driven by rising long-term interest rates—a result of 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 up trend and a short-term up 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 160 and 162 yen per dollar range.
In the U.S. markets this week, attention will likely focus on the resumption of tanker traffic through the Strait of Hormuz following the agreement between the U.S. and Iran to lift the naval blockade. On the economic front, key indicators to watch include the PCE Price Index, durable goods orders, the S&P PMI, and the University of Michigan Consumer Sentiment Index. Globally, PMIs for Japan, Germany, the Eurozone, and the U.K., as well as Germany’s business climate index, are scheduled for release.
Last week, the Nikkei Average traded above the projected range. The high was about 340 yen above the upper limit, and the low was about 2,310 yen above the lower limit.
This week, the Nikkei Average is expected to trade within a range defined by the upper limit at the +2σ Bollinger Band (currently around 71,860 yen) and the lower limit at the 25-day moving average (currently 65,730 yen).
The Nikkei Average is likely to continue its upward trend for the time being this week, provided that the U.S. and Iran honor their agreement to lift the naval blockade and crude oil tankers continue to pass through the Strait of Hormuz without incident.
