Nikkei 225 Index forecast as China and Japan tensions escalate

The Nikkei 225 Index retreated by 1% today, Jan. 7, to ¥52,000, down from this week’s high of ¥52,590. It dropped as the ongoing geopolitical tensions between China and Japan escalated.

The China-Japan crisis has escalated

The Nikkei 225 Index dropped as investors reacted to the escalating geopolitical crisis between Japan and China. In a statement this week, China announced controls on exports to Japan for military use, intensifying a crisis that has been going on since Sanae Takaichi became prime minister. 

China announced that it will block the sale of all dual-use items for military use, including rare earth materials. The country blamed Japan’s statement that it may intervene in the Taiwan Strait.

Japan protested the announcement, noting that it may impact more than 40% of the shipments. It then asked China to withdraw the guidance, with a minister saying:

Analysts believe that many companies in the Nikkei 225 Index will be affected. The most notable ones are automakers like Toyota, Mazda, Mitsubishi, and Honda. These companies mostly rely on rare earth materials, mostly from China. 

Toyota stock dropped by over 1.65% in New York, while Honda Motor was down by 1.7%. Nissan shares also fell by nearly 2%.

Other companies that may be impacted are Mitsubishi Heavy, Hitachi, Itochu, and Hamamatsu Photonics. On the other hand, rare earth companies like Toyo Engineering soared by over 20% as investors anticipated more demand since China accounts for 70% of the supply. 

On the positive side, there are chances that the two countries will reach an agreement later this year. A good example of this is what happened between the US and China last year. 

Meanwhile, the Japanese yen has remained stable as the crisis has escalated in the past few weeks. The USD/JPY exchange rate was trading at 156.51 on Wednesday, inside a range it has been at in the past few weeks. 

Japanese bond yields have remained steady in the past few days. The yield of the ten-year was trading at 2.10%, a few points below the highest point this year.

Nikkei 225 Index technical analysis 

Nikkei 225 Index chart | Source: TradingView

The daily timeframe chart shows that the Nikkei 225 Index was trading at ¥52,000, down from this year’s high of ¥52,590. The current level is above the upper side of the symmetrical triangle pattern, a common bullish sign.

It has remained above the 50-day and 100-day Exponential Moving Averages (EMA). Also, it has remained above the Supertrend indicator. Therefore, the most likely forecast is bullish, with the next key resistance at ¥53,000. On the flip side, a drop below the support at ¥51,500 will invalidate the bullish outlook.

The post Nikkei 225 Index forecast as China and Japan tensions escalate appeared first on Invezz