The Nikkei 225 Index pulled back on Monday as traders focused on the Japanese yen’s weakness and the potential actions from the BoJ. It also fell a bit ahead of crucial macro data from Japan. It was trading at 69,230, a few points below the year-to-date high of 72,750.

Japan stocks retreat amid yen weakness

The Nikkei 225 Index fell modestly as the Japanese yen resumed its retreat. The USD/JPY pair rose to 161.77 on Monday, up moderately from last week’s low of 160.62. 

Japan’s yen weakness has been exacerbated by the rising fear that the Bank of Japan will fall behind the curve in tightening. It has also fallen because of the spread between Japan’s and US interest rates. 

The BoJ hiked interest rates by 0.25% in the last meeting, bringing them to a 20-year high of 1%. In the US, the Federal Reserve maintained them unchanged between 3.50% and 3.75%, with officials signaling their willingness to hike later this year if inflation remained stubbornly high.

A weaker Japanese yen is a double-edged sword in Japan. It benefits companies that focus on exports by making their products a bit cheaper than their competitors. Also, it benefits companies with large operations outside the US.

A weaker yen, on the other hand, affects companies that deal with imported raw materials because their costs often go up. 

The Nikkei 225 Index will react to any potential interventions by the BoJ. It can intervene by buying yen directly, using its massive balance sheet. It has already spent over $70 billion in interventions this year. Alternatively, the bank can hike rates to bridge the gap with the US. 

The next key catalyst for the Nikkei 225 Index will be important macro data from the country. For example, Japan will publish the latest household spending data on Tuesday. Economists expect the report to show that spending dropped by 2.2% in May after falling by 0.5% in the previous month.

Japan will also publish its current accounts and bank lending data on Wednesday, followed by the Producer Price Index (PPI) on Friday. Economists expect the upcoming PPI number to come in at 6.8%, a sign that inflation remained at an elevated level.

The Nikkei 225 Index will also react to the upcoming Federal Reserve minutes, which will provide more information on what to expect later this year.

Nikkei 225 Index technical analysis

Ni225 Index chart | Source: TradingView The daily chart shows that the Nikkei 225 Index pulled back from the all-time high of 72,750 to 69,274. On the positive side, the index has slowly formed a falling wedge pattern, a common bullish reversal sign. 

It has also formed a bullish flag-like pattern, which is made up of a vertical line and a descending channel. Also, it remains above the 50-day and 100-day moving averages.

Therefore, the index will likely bounce back later this week as investors target the all-time high of 72,750. 

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