The bullish momentum behind Japanese stocks continues, as Nikkei 225 surged above 30k points. It rallied over 4k points in 2023 as investors were attracted by the weak local currency and an economic rebound following the COVID-19 pandemic.
Nikkei 225’s outperformance is unsurprising, given that foreign capital pours into Japan. As reported by CNBC, foreign investors bought 2.1 trillion yen worth of Japanese stock in April alone. That would be the equivalent of about $15.4 billion.
So what drives foreign investors to buy Japanese stocks? Two things might help explain the rationale behind the investment.
First is the local currency. The USD/JPY exchange rate currently sits around 137, and a weak currency is an incentive for foreign investors that can convert the strong dollar into the local currency and buy stocks.
Sure enough, USD/JPY traded above 150 in the last months of 2022, and one may argue that now, at 137, the yen is not so cheap anymore. But if you think that USD/JPY was at 116 in February 2022, then the yen’s decline is obvious.
Moreover, it is likely to stay, as the Bank of Japan has no intention of altering its yield curve control policy. At least, not yet, according to their latest monetary policy statement.
Second, economic stability and growth are great incentives in a world of geopolitical uncertainties. Post-COVID-19 spending led to the economy rebounding more than expected, and the trend looks promising.
Nikkei 225 to challenge the previous double top pattern
In 2021, when the US stock market made a series of all-time highs, the Nikkei 225 index stumbled across horizontal resistance below the 31k area. It formed a double top pattern, a reversal one.
So powerful was the rejection that the bearish pattern held the price action for the years following. But bulls did not give up and constantly bought the dips.
Nikkei 225 chart by TradingView
In the end, a bullish triangle formed, and the market broke higher earlier this year. Given where the market is, it looks poised to break the double top’s resistance.
A contracting triangle’s measured move equals a minimum 75% of the longest segment projected from the end of the triangle. The outcome easily exceeds 31k, so more upside is likely for the Nikkei 225 index.
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