[Fundamental viewpoint]
Last week, amid lingering concerns about a recession and the situation in Iran, speculation arose that the Treasury Department’s purchases of long-term government bonds would have only a limited impact on reducing the debt supply, causing stock indices to decline for the week.
Weekly percentage change: Dow Jones: -0.85%, NASDAQ: -2.05%, S&P 500: -1.43%
On the other hand, medium- to long-term
risks include concerns over military conflicts in the Middle East and the
protracted conflict in Ukraine; financial instability caused by inflation and
rising interest rates driven by high crude oil prices, along with concerns
about a global economic slowdown; and concerns over a real estate bubble burst
and an economic slowdown in China. Furthermore, these factors have raised
concerns about the onset of stagflation. In addition, continued vigilance is
required regarding geopolitical risks in Latin America and East Asia..
Considering the OECD’s nominal GDP forecasts for 2026, the Japanese market is undervalued by 0.08 points relative to the U.S. market. This undervaluation stems from the difference between the S&P 500’s P/E ratio of 21.0 and the projected P/E ratio of 17.0 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 widen by an additional 0.08 percentage points compared to the OECD forecast (either Japan’s forecast is revised downward or the U.S.’s is revised upward). Alternatively, the projected P/E ratio for the current fiscal year for Nikkei 225 constituent stocks must reach approximately 17.2. Or, the Nikkei 225 must reach approximately 66,890 yen.
Consequently, the Japanese market is undervalued by about 700 yen in the medium to long term.
From a fundamental perspective, one could say that the Japanese market is slightly less attractive than the U.S. market. Last week, the Japanese market became undervalued.
[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 negative 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 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 +10.9%. This represents an improvement of +0.3 percentage points compared to three months ago. The profit growth rate was +18.1%, marking an improvement of +8.8 percentage points compared to three months ago.
③ Although U.S. long-term interest rates rose and the interest rate differential between Japan and the U.S. widened from 1.84 to 1.86, the dollar-yen exchange rate moved in the direction of yen appreciation, ranging from the 158-yen level to the 159-yen level. The Dollar Index fell 0.80% 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 Net buying was recorded in the second week of August. It is highly likely that net selling occurred in the third week of August, and net selling is expected this week. Last week, out of the five points, points ① and ③ were bearish factors.
[Technical viewpoint]
From a technical perspective, the Japanese market is overvalued by 5.5 percentage points (equivalent to approximately 3,630 yen when calculated based on the Nikkei 225) relative to the NASDAQ, as measured by the difference in 200-day moving average deviations. Meanwhile, the Japanese market is overvalued by 5.9 percentage points (equivalent to approximately 3,890 yen when calculated based on the Nikkei 225) relative to the NY Dow, as measured by the difference in 200-day moving average deviations.
The Japanese market is performing stronger than the Dow Jones Industrial Average and the NASDAQ. The VIX, an indicator of volatility in the U.S. market, rose to 15.1 for the week. The Nikkei VI fell to 28.4 for the week. The U.S. market is in a “state of optimism,” while the Japanese market is in a “slightly fearful” state.
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 within the cloud of the Ichimoku Kinko Hyo chart. The overall deviation rate is +13.6%, and the deviation rate from the 200-day moving average is +13.3%. With two factors positive, a “yellow light” is lit for the medium-term trend.
In the US market, the NY Dow is below the 9-day line and above 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.
The U.S. market is showing a “yellow 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 no trend. The Japanese market is in a medium-term no 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 157 and 159 yen per dollar range.
In the U.S. markets this week, as investors grapple with persistently high energy prices and a widening fiscal deficit, attention will focus on speeches by FOMC members at the Jackson Hole Symposium. Additionally, NVIDIA’s earnings report is expected to serve as a leading indicator of AI demand. On the economic front, data such as the July PCE Price Index and durable goods orders will be released. Globally, the minutes from the ECB’s policy meeting, German business sentiment indicators, and Japan’s consumer confidence index and unemployment rate will be released.
Last week, the Nikkei 225 fell below the expected range. The high was about 980 yen below the upper limit, and the low was about 650 yen below the lower limit.
This week, the Nikkei 225 is expected to trade within a range defined by the upper limit at the +1σ level of the Bollinger Bands (currently around 67,580 yen) and the lower limit at the -1σ level (currently 63,650 yen).
The Nikkei 225 is likely to remain weak this week if uncertainty surrounding the situation in the Middle East and expectations of rising U.S. long-term interest rates persist.
