• Impending potential fiscal stimulus measures are supporting the recent two days of rallies seen in the Nikkei 225.
  • Technical analysis with TOPIX sector rotation suggests a likely start of a major impulsive up move sequence on the Nikkei 225.
  • The biggest risk for Nikkei 225 bulls is likely the main CDP opposition party mounting a challenge to LDP’s right to lead in the lower house.

This is a follow-up analysis of our prior report, “Nikkei 225: Potential bullish key reversal week after 4 weeks of decline” published on 8 August 2024. Click here for a recap.

Since our last publication, Nikkei 225, one of the major benchmark stock index in Japan has rallied as expected that saw a gain of 15% to hit an intraday high of 40,257 on 15 October.

Thereafter, it staged a minor corrective decline of 6% to print an intraday low of 37,713 on 25 October, ahead of Sunday’s snap general election.

More potential fiscal stimulus measures negate short-term negative political factor

The outcome of Sunday’s snap general election for the lower house of Japan parliament saw the anticipated defeat of long-ruling Liberal Democratic Party (LDP) led coalition with Komeito that failed to secure a majority seating of 233 in the lower house for the first time since 2009.

The LDP-Komeito coalition only managed to grab a combined 215 seats which now opens the possibility of LDP to approach other smaller opposition parties such as the Democratic Party for the People (won 28 seats) or the Japan Innovation Party (secured 38 seats) to obtain the 233-majority seating to govern.

During Monday, 28 October press conference, current LDP leader and Japan’s Prime Minister Ishiba does not hint of any intention of stepping down from his leadership position. In addition, he stressed the importance of implementing a meaningful economic stimulus package together with an additional budget as soon as possible that would incorporate the ideas and measures from other political parties.

Hence, the latest political stance from Ishiba suggests that the LDP is likely to embrace more pro-growth fiscal policies that support small and medium-sized firms to hike workers’ salaries, and the upcoming size of the latest package may exceed last year’s extra budget of 13 trillion yen.

The Nikkei 225 reacted positively where it totally erased the initial gapped down of -0.4% on Monday’s opening session and staged a two-day rally of 1.8% and 0.8% respectively as on Tuesday, 29 October.

This biggest risk now is the main opposite party, Constitutional Democratic Party of Japan (CDP) that saw a significant improvement on its election performance as it won 148 seats to mount a political challenge to LDP leadership in the lower house. Some of CDP’s proposed policies are financial income taxation and tax increases which may trigger a negative sentiment towards the Japanese stock market.

Nikkei 225 bullish reversal after a test of key moving averages led by cyclical sectors

Fig 1: 1-month rolling performances of the 17 TOPIX sectors as of 29 Oct 2024 (Source: TradingView, click to enlarge chart)

Fig 2: Nikkei 225 long-term secular & major trends as of 29 Oct 2024 (Source: TradingView, click to enlarge chart)

In the lens of technical analysis, the recent two days of price actions movements seen in the Nikkei 225 and several cyclical TOPIX sectors have been “encouraging” for the bulls to maintain the current major and long-term secular uptrend phases of the Nikkei 225.

The multi-day corrective decline of 6% from its 15 October high has tested the 50-day and 200-day moving averages before it reversed up and retraced almost 50% of its prior losses from 15 October high to 25 October low.

In addition, the 2-day recovery of the Nikkei 225 has been led by three cyclical sectors of the wider TOPIX index; the Banks (+6.71%), Financials ex banks (4.36%), and Automobiles & Transportation Equipment (+3.23%) that have outperformed on a one-month rolling basis as of 29 October (see Fig 1).

Therefore, the odds are now skewed towards the bulls in the Nikkei 225 to kickstart a potential major impulsive up move sequence.

Watch the 35,850 key medium-term pivotal support and a clearance above 40,060 is likely to see the next major resistance zone coming in at 42,600/43,400 (also the upper boundary of the long-term secular ascending channel in place since 19 March 2020 low) (see Fig 2).

On the flip side, a break below 35,850 negate the bullish tone for another multi-week corrective decline sequence to resurface for a retest close to the 30,460 long-term pivotal support.

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