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14th October - the Nikkei's strength is set to continue

16 October 2017



The market is on the point of overcoming two prior highs: from 2007 and another from 2015.



The engine of progress for the Nikkei has been the completion (in September) of a complex Head and shoulders continuation pattern that is set to drive the market a good deal further still.

The minimum move implied by the pattern? 24500

Note too the push up through the Prior High at 20950.

That level should now serve as support  on any set-backs and thereby ratchet the market higher still.


The rally in the Nikkei index over recent weeks has drawn support from several factors:

A decline in risk aversion as the war of words between North Korea and the US has not only failed to produce conflict, but has gradually reduced in volume
Inflation has nudged higher although still low
Economic activity remains buoyant.
The Yen has weakened against the Dollar,

The decline in risk aversion is important because of the proximity of Japan, a key US regional ally, to its neighbour North Korea and therefore a likely target in any conflict between North Korea and the US.

 Now tensions have eased, investors have turned their attention towards growth and according to a recent IMF assessment of the global economy, growth looks set for its best performance in all the major economic areas, including Japan for several years.

Any increase in inflation no matter how small, is a measure of how successful the Bank of Japan’s monetary policy is proving to fuel growth. But because progress towards the inflation target is proving painfully slow, the Bank of Japan must maintain its exceptionally loose policy settings and bond buying program which has a pass through impact on stocks.

But probably the major factor in the Nikkei’s rally is the weakness of the Yen against the Dollar:

The close relationship between the Yen and the Nikkei has been a long-established.

As a major exporting economy, a weak Yen is seen as a key ingredient in promoting economic growth and it is certainly no coincidence that as the Yen rejected the highs against the Dollar in early September, the Nikkei simultaneously rejected the lows.

How much further can the Yen weaken and the Nikkei rally? That rather depends on events in the US.

The Japanese authorities have their policy path firmly set as a loose monetary policy designed to drive up inflation and thereby fuel growth.

In the US the situation is less clear. Since coming to the Presidency Trump has struggled to get any of his key policies in play. During the election campaign he promised to cut tax, spend on infrastructure renewal and increase the armed forces. But to date he hasn’t managed any of these.

Recently he has restated his intension to cut corporation tax. The US Federal Reserve has in response embarked upon a course of balance sheet reduction and recently decided that interest rates do need to simultaneously rise further. In response traders have taken another bullish look at the Dollar and if Trump does succeed in pushing through his policies, which would grow the budget deficit and fuel inflation, thereby prompting the Fed to become yet more aggressive, the Dollar would surely rally against the other majors including the Yen.

For the Nikkei this would serve to send the stock market higher still. Coupled with a bullish sentiment that would come from the US as a result of Trump’s pro-growth policies we judge the Nikkei can extend the current rally further. 

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19th October - Can Sterling Euro hit par

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6th October - Watch Cable- it is set to weaken a lot further

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