Outlook for the Nikkei average this week [5 July 2026]

 [Fundamental viewpoint]

In the U.S. markets last week, although concerns over the profitability of massive investments in AI weighed on sentiment, there was also a move to buy back leading stocks that had been undergoing a correction recently, and stock indices rose for the week.

Weekly percentage change: Dow Jones: +1.97%, NASDAQ: +2.12%, S&P 500: +1.76%

                                       

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 0.37 points relative to the U.S. market. This overvaluation stems from the difference between the S&P 500’s P/E ratio of 21.7 and the projected P/E ratio of 18.5 for companies in the Nikkei 225 index 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 0.37 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 17.3. Or, the Nikkei 225 must reach approximately 65,300 yen.

Consequently, the Japanese market is overvalued by about 4,450 yen in the medium to long term.

From a fundamental perspective, one could say that the Japanese market is about 4,450 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 negative. The daily is a above the 200-day line and within 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 +10.5%. This represents an improvement of +1.6 percentage points compared to three months ago. The profit growth rate was +11.8%, marking an improvement of +13.3 percentage points compared to three months ago.

③    Although long-term U.S. interest rates rose, the interest rate differential between Japan and the U.S. narrowed from 1.78 to 1.71, and the dollar-yen exchange rate moved from the 162-yen range to the 160-yen range, reflecting a strengthening of the yen. The Dollar Index fell by 0.48% 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    It is highly likely that net selling occurred in the fourth week of June and net buying in the first week of July, and net selling is expected this week. Last week, out of the five points, point ① was a bullish factor.

 

[Technical viewpoint]

From a technical perspective, the Japanese market is overvalued by 18.2 percentage points (equivalent to approximately 12,690 yen for the Nikkei 225) relative to the NASDAQ based on the 200-day moving average deviation. Meanwhile, it is overvalued by 18.0 percentage points (equivalent to approximately 12,550 yen for the Nikkei 225) relative to the NY Dow based on the 200-day moving average deviation.

 

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 15.8 for the week. The Nikkei VI rose to 34.1 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 above 25-day moving averages. A “yellow 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 +41.8%, and the deviation rate from the 200-day moving average is +26.9%. 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 below the 9-day line and 25-day and above 200-day lines. It is within  the clouds the Ichimoku Chart.

It is a ‘yellow light’ in the short term and a ‘yellow 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 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 160 and 162 yen per dollar range.

 

In the U.S. markets this week, although energy prices have fallen, long-term interest rates remain high, and monetary policy has once again become the focus of market attention, with the upcoming release of the June FOMC minutes drawing particular interest. On the economic data front, the ISM Services PMI, existing home sales, and the trade balance will be released. Globally, attention will focus on Germany’s industrial production and trade statistics, Japan’s personal consumption and producer price index, China’s inflation rate, and OPEC’s decision on crude oil production levels.

 

Last week, the Nikkei Average traded above the expected range. The upper limit was exceeded by about 1,250 yen, and the lower limit by about 1,500 yen.

This week, the Nikkei Average is expected to trade within a range defined by the upper limit at the +1σ Bollinger Band (currently around 70,880 yen) and the lower limit at the -1σ Bollinger Band (currently 66,110 yen).

                           

The Nikkei 225 is likely to continue its downward trend this week unless concerns regarding the profitability of massive investments in AI are alleviated in the U.S. markets.