Outlook for the Nikkei average this week [16 August 2026]

 [Fundamental viewpoint]

In the U.S. markets last week, diminished expectations of an interest rate hike by the Fed provided a positive boost, while concerns about an economic recession and the situation in Iran weighed on the markets, resulting in mixed weekly performance for the major stock indices.

Weekly percentage change: Dow Jones: -0.56%, NASDAQ: +0.14%, S&P 500: +0.36%

 

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 overvalued by 0.06 points relative to the U.S. market. This overvaluation stems from the difference between the S&P 500’s P/E ratio of 21.4 and the projected P/E ratio of 17.7 for companies included in 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. for 2026 must narrow by an additional 0.06 percentage points relative to the OECD forecast (either Japan’s forecast is revised upward or the U.S.’s is revised downward). Alternatively, the projected P/E ratio for the current fiscal year for Nikkei 225 constituent stocks must reach approximately 17.5. Or, the Nikkei 225 must reach approximately 67,950 yen.

Consequently, the Japanese market is overvalued by about 770 yen in the medium to long term.

From a fundamental perspective, the Japanese market could be considered slightly more attractive than the U.S. market. Last week, the Japanese market shifted into overvalued territory.

 

[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 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 +11.0%. This represents an improvement of +0.5 percentage points compared to three months ago. The profit growth rate was +17.8%, marking an improvement of +9.3 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. narrowed from 1.88 to 1.84, the dollar-yen exchange rate moved in the direction of yen weakness, ranging from the 157-yen level to the 159-yen level. The Dollar Index rose 0.03% 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.

Net selling was recorded in the first week of August. It is highly likely that net buying occurred in the second week of August, and net buying is expected this week. Last week, points ② and ③ were bullish factors out of the five listed.

 

[Technical viewpoint]

From a technical perspective, the Japanese market is overvalued by 8.5 percentage points (equivalent to approximately 5,840 yen for the Nikkei 225) relative to the NASDAQ based on the 200-day moving average deviation. Meanwhile, it is overvalued by 10.3 percentage points (equivalent to approximately 7,080 yen for the Nikkei 225) relative to the NY Dow based on the 200-day moving average deviation.

 

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, fell to 14.3 for the week. The Nikkei VI rose to 31.0 for the week. The U.S. market is in a state of “optimism,” while the Japanese market is in a state of “fear.”

 

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 within the cloud of the Ichimoku Kinko Hyo chart. The overall deviation rate is +27.7%, and the deviation rate from the 200-day moving average is +18.9%. 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 above the 9-day line and 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 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 158 and 160 yen per dollar range.

 

This week, U.S. markets will continue to closely monitor developments in the Middle East and trends in crude oil prices. Interest rate trends will also be in focus following the release of the FOMC meeting minutes. Economic indicators set to be released include the S&P Flash PMI, building permits, and industrial production. Globally, data to be released includes the Eurozone PMI, Japan’s PMI, second-quarter GDP, trade balance, and inflation rate, as well as China’s industrial production, retail sales, and housing prices, and the UK’s PMI and unemployment rate.

 

Last week, the Nikkei Average traded above the expected range. The upper limit was exceeded by about 1,680 yen, and the lower limit by about 2,120 yen.

This week, the Nikkei Average is expected to trade within a range defined by the upper limit at the +2σ Bollinger Band (currently around 70,000 yen) and the lower limit at the 25-day moving average (currently 65,850 yen).

 

With uncertainty surrounding the situation in the Middle East persisting and the earnings season nearing its end, the Nikkei 225 appears poised for a pause this week, given the extent of its recent rally and the time elapsed.