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Can the Nikkei 225 chart new territory this month?

By Stuart Fieldhouse
4th August 2025

Related topics: Nikkei 225, Bank of Japan, Japanese government bonds, Tariffs

Can the Nikkei 225 chart new territory this month?

After a tumultuous plunge last year, Japan’s equity markets have staged a vigorous comeback. The Nikkei 225 index entered August trading above 41,500, within striking distance of its all-time high.

This marks a remarkable 26% recovery from the lows seen in August 2024, when a confluence of domestic political turmoil, global inflation, and hawkish monetary policy triggered the sharpest monthly decline in the index for over three decades.

One year on, the landscape is notably more benign. Political uncertainty has receded following the resignation of the prime minister after the ruling coalition’s defeat in the Upper House elections. The subsequent transition has ushered in a phase of measured reform, offering markets a semblance of stability. Meanwhile, trade tensions with the United States appear to have eased. Though a 15% tariff was imposed on certain Japanese imports, including automobiles, the outcome has been viewed more as a negotiated compromise than the beginning of a full-blown escalation.

This resolution, albeit partial, has allowed equity investors to recalibrate their expectations. The perceived avoidance of a deeper trade conflict has restored confidence, not just in Japanese equities but across Asian markets. Yet this optimism remains tempered by a more complex macroeconomic picture.

Japanese corporate valuations on the rebound

Corporate valuations have rebounded sharply. Analysts project a 12-month upside potential of approximately 9%, with consensus estimates targeting a Nikkei level above 45,000, comfortably past its historical peak. However, fewer than half the companies in the index currently enjoy a “buy” recommendation, underscoring the need for investor selectivity. Several industrial firms have led the charge, with some tripling their share prices since last August’s trough. Automakers have also shown outsized gains, propelled by relief over the trade détente.

Still, the bond market tells a more cautious story. Yields on Japanese government bonds have risen markedly, with the 10-year JGB reaching 1.59%, a level not seen in over a decade. The climb reflects expectations that the Bank of Japan may have little choice but to tighten monetary policy before year-end. Higher fiscal spending, particularly the prospect of significant Japanese capital being deployed in U.S. infrastructure investments, has fuelled concerns about growing domestic funding pressures.

The yen has come under renewed strain. Reports of Japanese commitments totalling up to $550bn in overseas projects have raised the spectre of capital flight. With the yen weakening, repatriated returns from foreign investments could fall, diminishing support for local asset prices. The USD/JPY exchange rate, a key metric for carry trades, has become a bellwether of investor sentiment and could introduce volatility into Japanese equities.

Nikkei 225 technical analysis

From a technical standpoint, momentum indicators point to a market nearing an inflection. A rebound from 39,727 points extended through Asian and European sessions, suggesting underlying bullishness. However, the crossing of the 200-period moving average above the 100-period on hourly charts, a so-called death cross, hints at short-term fatigue. While not yet confirmed in daily charts, the development may foreshadow a period of consolidation or even mild correction. Momentum oscillators are mixed: the RSI hovers in neutral territory, while the MACD has begun to trend downward.

Support levels are clearly defined. A drop below 37,652 could signal a more extended retracement, with additional support likely around 36,658. Conversely, a break above 42,049 would open the door to new highs and reassert the upward trend. The coming weeks will test the strength of the rally and investor appetite for risk.

All eyes on the Bank of Japan

Japan’s equity renaissance reflects both fundamental improvements and a recalibration of external risks. Yet the path forward is unlikely to be linear. Rising yields, a weakening yen and growing fiscal obligations present genuine challenges to policymakers and investors alike. The Bank of Japan’s next steps will be pivotal. Should it move too quickly on tightening, asset prices could wobble. Move too slowly, and inflationary pressures may mount, further eroding currency stability.

In this environment, caution may be more valuable than exuberance. For investors, the Nikkei’s climb is no longer a simple story of rebound. It is one of navigating shifting macro terrain, increasingly reliant on careful stock selection, currency hedging, and an eye on the central bank. Japan’s market may be resurgent, but the risks, both domestic and global, are far from behind.