Nikkei 225 index recoils after new BoJ pick, Japan GDP miss

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The Nikkei 225 (NI225) index moved sideways on Tuesday after the Japanese government confirmed the next Bank of Japan (BoJ) chair. It consolidated at ¥27,575 as investors assessed the new policy shift as Haruhiko Kuroda’s decade tenure winds up. This price is ~7.5% above the lowest point in January.

Kazuo Uoda next BoJ governor

The Japanese government confirmed that Kazuo Uoda will be the next BoJ governor. This announcement confirmed the rumours that emerged on Friday, as I wrote here. Therefore, the Nikkei 225 and the USD/JPY pair moved sideways because his appointment was in line with expectations. 

Also, investors don’t expect a major paradigm shift in the Bank of Japan in Uoda’s leadership. Instead, he will likely maintain Kuroda’s dovish tone for a while. Under Kuroda, the BoJ left interest rates at the lowest point in decades and implemented one of the biggest quantitative easing (QE) policies on record.

As shown below, BoJ’s balance sheet has jumped to over $7.7 trillion. When Kuroda became governor a decade ago, the BoJ’s balance sheet was about $1.57 trillion. Therefore, this means that the BoJ holds more assets compared to Japan’s economy whose GDP stands at about $4.9 trillion.

BoJ balance sheet

Higher interest rates in Japan would have a major impact on the economy because of its high public debt. Japan has a total government debt of over $9.8 trillion, giving it a debt-to-GDP ratio of over 266%. Most of this debt is owed to the BoJ, which has printed trillions recently.

Therefore, with Japan’s economy facing multiple headwinds, there is a likelihood that the BoJ will maintain a muted tone in the coming months. However, rising inflation, which has jumped to a multi-decade high, could see the bank tweak its yield curve policy.

And data published on Tuesday showed that Japan GDP expanded by 0.2% in Q4, lower than the expected increase of 0.5%. This growth happened as capital expenditure shrank by 0.5%. Private consumption and external demand rose by 0.3% and 0.5%, respectively.

The Nikkei 225 index remained muted after Uoda’s appointment. The best constituent companies were Mitsui Engineering, Tokai Carbon, Kawasaki Kisen Kaisha, Osaka Gas, and Mitsubishi Heavy Industries.

Nikkei 225 index forecast

Nikkei index chart by TradingView

The Nikkei index formed a strong support at ¥25.560, where it failed to move below in December, October, June, and May last year. It has moved a few points above the 50-day and 200-day exponential moving averages (EMA). 

The index remains slightly below the descending trendline shown in black. This trendline connects the highest points since September 2021. Therefore, the Nikkei index will likely remain in this consolidation phase in the coming days. A bullish breakout will only be confirmed if it moves above the trendline at about ¥28,000.

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