Nikkei 225 poised for rebound amid tariff de-escalation signals
Japanese equities have seen a correction over the past month, weighed down by US tariffs that disproportionately affected export-oriented firms such as Toyota, Tokyo Electron, and Fast Retailing. However, the Nikkei 225 appears to have stabalised around the April low of 30,650.
While tariffs remain a significant challenge, especially with the US being Japan's largest export market, there is optimism for upside potential if bilateral negotiations progress and trade deals are inked. US officials have hinted at prioritising Japan in upcoming trade talks, raising the likelihood of targeted tariff relief or exemptions. If such a scenario materialises, Japanese equities may lead a regional rebound.
In addition, recent developments also indicate a possible softening of US trade rhetoric. Treasury Secretary Scott Bessent said that the tariff standoff between US and China is 'unsustainable' and that tensions could de-escalate in the coming months, though a comprehensive agreement may take two to three years. Separately, Trump also hinted at reducing tariffs significantly from current levels. While formal negotiations are pending, markets are likely to begin pricing in the potential for near-term relief.
On the macro front, rising real wages in Japan are fuelling hopes for a sustainable wage-price spiral, which could drive consumer spending and demand-led inflation. At the corporate level, structural reforms and increased shareholder activism have led to higher dividends and record share buybacks, which could offset some of the impact from tariffs.
However, a stronger Japanese yen due to safe-haven demand and the Bank of Japan's policy normalisation could cap near-term upside. The historically negative correlation between USD/JPY and the Nikkei 225 remains a key dynamic to watch as a stronger yen tends to weigh on export-oriented equities.
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Despite the market turbulence over the past month, the structural bull case for Japan equities remains intact. Key drivers include improving corporate profits, corporate governance reform, shareholder activism, unwinding of crossholdings, tax-free investing via the Nippon Individual Savings Account which is meant to help residents in Japan save money with tax-exempt benefits, and the return of healthy inflation and real wage growth.
Nikkei 225 technical outlook
In our view, we believe Japanese equities are well-positioned to benefit from a potential easing of tariff risks, accompanied by strong domestic fundamentals. If momentum holds and tariff risks are repriced lower, the Nikkei 225 could emerge as one of the early leaders in a broader Asia-Pacific recovery.
From a technical standpoint, there is presence of a rebound from the Apr 7 low of 30,650 as shown on the daily chart of the Osaka Nikkei 225 Mini Futures contract.
Based on a Fibonacci Extension drawn from the August 2024 low to the January 2025 high, and April 2025 low, the index is currently set to test the 50 per cent extension level near 35,767.50. The 14-day Relative Strength Index indicator sits near 49, indicating neutral momentum. A downside break below the 33,065 level may open a path towards retesting 30,650.
Conversely, resistance may be encountered around 35,767; a break above could trigger a move towards the next resistance level at around 36,975.
The writer is senior investment analyst at Phillip Nova
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