Nikkei 225 slides as investors shrug off rumours of BOJ open-ended QE

USDJPY Japanese Yen
USDJPY Japanese Yen

The Nikkei 225 index declined by more than 0.80% as investors reacted to news that remdesivir had failed in clinical trials. The drug, developed by Gilead Sciences was hailed last week for its ability to cure the coronavirus. Investors also reacted to news that Donald Trump was thinking of extending the social-distancing measures. Other Asian indices like China A50 and Hong Kong’s Hang Seng declined by more than 50 basis points.

Nikkei 225 Best and Worst-Performers

Most companies in the Nikkei 225 index were in the red today. Among the best-performing stocks were Omron, NKSJ, Yahoo Japan, and Fujikura, which rose by more than 3%. The worst-performing stocks were Alps Electric, Tokyo Gas, Taiyo Yuden, and Casio Computer among others. These companies dropped by more than 3%.

Nikkei 225 Supported by Bank of Japan

The weakness of the Nikkei 225 index received a boost from the Bank of Japan. In an exclusive article, Nikkei said that the BOJ was considering buying unlimited government bond buying as a way of supporting the ravaged economy.

By doing this, the bank will be following the footsteps of the Federal Reserve, which announced an open-ended quantitative easing program. By using this approach, the BOJ will be expanding its QE from the current $742 billion program. In addition, the bank is also thinking of increase its purchase of corporate bonds and commercial paper from big companies. It will increase these purchases from the current levels of about 4.2 trillion and 3.2 trillion yen respectively.

The bank could announce these new measures when the members meet in the coming week.

Japan economy ailing

The actions by the BOJ will come at a time when the Japanese economy is ailing. As I wrote a while back, the economy will sink into a deeper recession than most analysts expect. This is mostly because of a tax increase that was made last year and the current state of emergency. Just yesterday, data from the country showed that the manufacturing output dropped to the lowest level in years. Another report by Tankan shows that business sentiment has dropped to a seven-year low.

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Nikkei 225 technical outlook

On the daily chart, the Nikkei 225 index is trading along the 38.2% Fibonacci retracement level. This retracement was drawn by connecting the YTD highs and lows. The index has also remained below the 50-day and 100-day exponential moving averages.

In the short-term, I expect the index to remain along these levels as investors wait for the BOJ decision on Tuesday. I also expect the index to attempt to retest the 50% retracement level at around ¥20,182.

On the flipside, it is likely that the upward trend that started in March will reverse now that bulls have failed to test the 50% retracement level at ¥20,182.

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