Nikkei 225 at crossroads as Japan sinks into deflation; trade risks mount

Nikkei declined by more than 80 basis points today as the economic outlook in the country worsened. The index also declined because of the risks posed by the ongoing China parliamentary sessions. The best-performing stocks in the Nikkei were Softbank Group, Fujitsu, ANA Holdings, Kaisei Electric Railway, and Kyowa Hakko. On the other hand, the worst-performers were Amada, JFE Holdings, and T&D Holdings.

Japan sinks into deflation

Japan stocks fell as the country fell into deflation after consumer prices declined in April. Data from the statistics office showed that consumer prices declined by 0.2% in April compared to 2019. This decline in prices was mostly due to a sharp decrease in tourism and travel and energy process.

While a decrease in consumer prices is usually relatively positive for consumers, it can have negative impacts on the economy and Nikkei 225 constituents. That is because producers will need to reduce their workforce because they are earning less money from the same products. In a statement, Kazuma Maeda, an analyst said:

“We look for inflation to remain negative with the decline in energy prices stemming from the drop in oil, a widening negative output gap under economic recession and falling hotel charges.”

Bank of Japan intervenes

The disturbing weakness in the Japanese inflation and the overall economy led the Bank of Japan to intervene. In an emergency meeting, the bank left interest rates unchanged at minus 0.1%. The bank also left its target for ten-year government bonds at 0%. On a positive note, the bank announced that it would boost lending to small and medium-sized companies in the country.

It will do this by providing banks with zero interest rates for up to one year. In this arrangement, the maximum amount a bank can borrow from the BOJ will depend on the amount it lends to SMEs. This financing will be a positive thing for companies in the Nikkei 225 index.

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Nikkei 225 technical outlook

The Nikkei 225 is trading at 20,388, which is lower than this week’s high of 20,757. On the daily chart, the price is hanging along the important ascending trendline shown in pink. The price is also slightly above the 50-day and 100-day exponential moving average. Therefore, a move below this support will be negative for the Nikkei. It will signal that bears are prevailing, which will see it attempt moving below 20,000.

On the flip side, a move above this week’s high will embolden the bulls. This will increase the probability that it will test the 61.8% Fib at 21165.

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