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Nikkei 225 Outlook Talking Points:

  • The Nikkei 225 trades within a narrow channel from late December
  • An unexpected shift in tone or a change to the BOJ's balance sheet policy could result in volatility
  • Learn tips to trade central bank rate decisions with our Trade the News Trading Guide

Nikkei 225 Outlook: Index Awaits BOJ, Rests on Channel Support

The Nikkei 225 will look to Friday’s interest rate decision from the Bank of Japan to influence price action. While no change to the 10-year yield target is expected, tone and commentary regarding the bank’s balance sheet may be a source of volatility for the index. As of Thursday, the index rests on the lower bound of a channel carved out from late December. Given the precarious position of the Nikkei, any indication that the bank may slow its balance sheet growth could see the channel rendered obsolete.

Nikkei 225 Price Chart: Daily Time Frame (October 2018 – March 2019) (Chart 1)

Nikkei 225 price chart

In recent years the BOJ has amassed considerable holdings on its balance sheet. As a form of expansionary monetary policy - the bank has purchased long-term government bonds, commercial paper - and Japanese real-estate investment trusts (J-REITS). Due to the bank’s purchasing activity in the space, it also owns roughly 70% of the Japanese ETF market according to Bloomberg. Consequently, the bank is a majority shareholder in an estimated 40% of all publicly traded Japanese companies.

Bank of Japan’s Buying Spree Continues (Chart 2)

BOJ balance sheet chart

Similarly, the constant stimulus has resulted in the ballooning of the bank’s balance sheet as a percentage of gross domestic product. As of March 2019, the bank’s holdings are equal to roughly 104% of the country’s annual GDP.

As Japanese GDP translates to the world’s third largest standalone economy, their economic might allows BOJ policy decisions to influence foreign equity markets, albeit to a lesser extent than that of the Japanese economy.

Dow Jones Price Chart: Daily Time Frame (January 2018 – March 2019) (Chart 3)

Nikkei 225 Outlook: Index Awaits BOJ, Rests on Channel Support

Dow Jones price chart overlaid with the ratio of S&P 500 to Nikkei 225 in red

With that in mind, Friday’s BOJ decision has potential to impact the S&P 500. Despite the Federal Reserve’s decision to slowly reduce the bank’s own balance sheet, the S&P 500 has continued to outpace the Nikkei 225 as growth fails to take root in the Japanese economy.

Learn the differences between the Dow Jones and the S&P 500

While the BOJ’s decision has market moving potential, the market reaction may be uneventful if history is any indication. Recent decisions have been met with expected outcomes as the bank looks to stand firm in its policy path - though the group's assessment of economic activity and financial stability should be monitored closely along with a market response. That said, a more appropriate asset to trade for the event may be USDJPY with interesting setups present in the pair.

--Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

Read more: GBPUSD: Sterling Slips After Latest Brexit Votes Approve Deadline Pushback

DailyFX forecasts on a variety of currencies such as the US Dollar or the Euro are available from the DailyFX Trading Guides page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.