Today, January 7, the Nikkei Index fell by 1% to Y=52,000 from a high this week of Y=52 590. The index dropped when the geopolitical tensions escalated between China and Japan.
China and Japan are in a crisis
Investors reacted negatively to the growing geopolitical conflict between Japan and China. The Nikkei Index fell. China has announced that it will be limiting exports of military equipment to Japan. This is a response to the escalating geopolitical crisis between Japan and China.
China has announced it will ban the sale of dual-use military items, such as rare earths. Japan was blamed for its statement that they may interfere in the Taiwan Strait.
Japan objected to the announcement and noted that the decision could affect more than 40 percent of the shipment. The country then requested that China withdraw its guidance. A minister stated:
The measures are not only against our country, but also a significant departure from international practices. “We intend to analyze and carefully review the details, and then consider any necessary response.”
Many analysts believe the Nikkei Index, which includes many Japanese companies, will be affected. Most notable are carmakers such as Toyota, Mazda and Mitsubishi. They rely mainly on Chinese rare earths.
In New York, Toyota shares fell by more than 1.65% while Honda Motors dropped by 1.7%. Nissan’s shares fell nearly 2%.
Mitsubishi Heavy, Hitachi Itochu and Hamamatsu Photonics are also companies which may suffer. Investors anticipated a higher demand for rare earth companies such as Toyo Engineering, since China accounted for over 70% of supply.
Positively, it is possible that both countries can reach a deal in the second half of this year. This is a good example, as it was between China and the US last year.
The Japanese yen, however, has been stable throughout the recent crisis. On Wednesday, the USD/JPY rate traded at 156.51. This is within a trading range that it’s been in for the last few weeks.
The yields on Japanese bonds have been stable in recent days. The yield on the 10-year bond was trading around 2.10%. This is a few percentage points lower than the peak of this year.
Nikkei 225 Index technical analysis
Nikkei 225 Index chart | Source: TradingView
On the daily chart, Nikkei was trading below its high for this year, Y=52 590. This level is currently above the upper edge of the triangle pattern, which is a bullish signal.
The Exponential Moving Averaging (EMA) has remained higher than the 100-day and 50-day EMA. It has also remained above Supertrend. The most probable forecast is bullish. Next, key resistance will be at Y=53,000. A drop below Y=51.500, the current support level, will invalidate a bullish forecast.
As updates occur, this post Nikkei Index Forecast as China and Japan Tensions Escalate may be updated.
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