Nikkei: Strong Outperformance and Policy Crosswinds

Japan’s Nikkei has been one of the strongest performers among developed markets this year. From the April 2025 lows near 31 000 to the early November peak above 52 600, the index has gained roughly 70 percent. This performance must be viewed in the context of a weakening yen, since the index is quoted in Japanese currency and benefits from currency depreciation through stronger export competitiveness.

The rally has been supported by the Bank of Japan’s gradual exit from ultra low interest rates. After ending negative rates in 2024, the BOJ raised its policy rate to 0.50 percent in early 2025. Inflation is running near 3 percent year on year, above the BOJ target, while public debt remains near 230 to 240 percent of GDP, limiting the room for aggressive tightening.

Fiscal policy has also turned expansionary. The new government approved a stimulus package of about 21.3 trillion yen, roughly 135 billion US dollars, which includes household vouchers, tax reductions, and energy subsidies. The programme is expected to lift GDP growth by around 1.4 percent over the coming years, although it may raise concerns about long term fiscal sustainability.

Policy Expectations and Currency Dynamics

Speculation has increased regarding a possible BOJ rate hike to 0.75 percent in December, supported by stronger export data showing growth of roughly 3.6 to 3.7 percent year on year in October. The yen has weakened rapidly, with USDJPY trading in the mid 150s and touching levels near 158, which many analysts view as stretched.

A weaker yen continues to support the Nikkei due to the index’s heavy weighting toward global exporters. At the same time, any shift toward tighter policy or a stabilisation in the currency could influence the pace of future gains.

Technical Outlook

Despite its strong performance this year, November has been challenging. From the late October high above 51 000, the index has pulled back toward the high 48 000s. The medium term uptrend from April remains intact, with the primary trendline and 50 day moving average both located near the 48 000 zone. This area is the key level to watch.

Below that, further support lies around 46 700 and 45 800. A sustained break below these levels would signal a potential end to the medium term trend. On the upside, initial resistance sits around 49 100 and 49 750, while the short term downward trendline currently intersects near 50 000. The RSI, now in the mid 40s, reflects weakening momentum and mild negative divergence since early October.

In the short term, direction will depend heavily on movements in United States indices and on the behaviour of the yen. The 48 000 area remains the decisive level for confirming whether this is a normal correction or the early stage of a deeper reversal.