Nikkei 225 Forecast: Start of new medium-term bullish trend amid rising JGB yields

[Redator]

Key takeaways

• Nikkei 225 rallies 34% from April lows to June highs, driven partly by post-tariff optimism despite Japan being targeted by US trade measures.
• Nikkei 225 outperforms globally, gaining 28% since 7 April, trailing only South Korea’s KOSPI and ahead of the Hang Seng and S&P 500.
• Rising 30-year JGB yields (+45 bps) spark a -4.2% Nikkei 225 pullback due to fiscal concerns ahead of Japan’s 20 July election.
• Strong economic & earnings data: Citigroup Surprise Index and Earnings Revisions Index support bullish fundamentals for Japanese stocks.
• Bullish technical breakout from flag pattern signals potential for Nikkei 225 to challenge resistance at 40,620 and 42,500/890.

This is a follow-up analysis of our prior report, “Nikkei 225 Outlook: Negative sentiment overshadows positive fundamentals” published on 4 March 2025.

Since our last publication, the price actions of the Japan 225 CFD Index (a proxy for the Nikkei 225 futures) have staged the expected corrective decline and retested the 5 August 2024 ‘s major swing low of 30,390 on 7 April 2025.

Thereafter, the Japan 225 CFD Index has staged a magnificent rally of 34% from the 7 April 2025 low to the 30 June 2025 high ex-post US “Liberation Day” in early April, where US President Trump announced a slew of higher reciprocal tariffs on the respective US trading partners, which include Japan, that has been hit with a 24% levy (now at 25% with an extended deadline of 1 August for negotiation)

Japan’s Nikkei 225, one of the best-performing stock indices

Fig 1: Major stock indices performances since 7 Apr 2025 till 17 Jul 2025 (Source: MacroMicro, click to enlarge chart)

On a closing level basis since 7 April, the Nikkei 225 is one of the top-performing Asia Pacific stock markets as of 17 July with a gain of 28%, just trailing behind the top performer, South Korea’s KOSPI’s return of 37%, and outperformed the Hong Kong’Hang Seng Index (24%), and US S&P 500 (24%). So far, the Nikkei 225 has yet to break above its current all-time high level printed in July 2024 (see Fig 1).

A recent spike in the 30-year JGB bond yield has created headwinds

The recent price actions of the Japan 225 CFD Index have staged a corrective decline of -4.2% from 30 June to 16 July, in line with the recent uptick seen on the long-term 30-year Japanese Government Bond (JGB) yield, where it rose by 45 basis points (bps) from the 4 July low of 2.75% to retest its recent all-time high of 3.2% (printed in May) on 15 June.

Japan’s surge in 30-year JGB yield reflects market anxiety over the upcoming upper-house election on Sunday, 20 July, and the spectre of expansive fiscal policies. With state debt near 250% of GDP and institutional demand skewed away from longer-term JGBs, the surge underscores a fragile balance between Japan’s fiscal commitments and monetary stance. If election outcomes favour populist spending, Japan risks rising borrowing costs and possible credit rating downgrades, forcing fiscal restraint or central bank intervention.

Other supportive fundamental factors can create a tailwind buffer

Fig 2: Japan’s Citigroup Economic Surprise Index as of 17 Jul 2025 (Source: MacroMicro, click to enlarge chart)

Fig 3: Japan’s Citigroup Earnings Revision Index vs US, UK & Europe as of 11 Jul 2025 (Source: MacroMicro, click to enlarge chart)

There are still supportive fundamental elements that can support further potential upside in the Nikkei 225 despite the ongoing rise in the longer-term JGB yields.

The Citigroup Economic Surprise Index for Japan has been on a steady increase since the 30 June 2025 reading of -8.20 to hit a recent level of 16.90 on Thursday, 17 July. The index is the sum of the difference between the actual value of various economic data and their consensus forecast. If the index is greater than zero and rising, it means that the overall economic performance in Japan is generally better than expected, which in turn, supports a potential strengthening in the Nikkei 225 (see Fig 2).

Secondly, the Japanese stock market has seen the steepest analysts’ earnings upgrades on average since 27 June, versus other regions (US, UK, Europe). Japan’s Citigroup Earnings Revision Index has risen significantly from 27 June’s print of -0.33 to the current level of 0.19 as of 11 July, another potential tailwind to support a bullish Nikkei 225 (see Fig 3).

Technical factors are suggesting a potential multi-month bullish trend for the Nikkei 225

Fig 4: JGB yield curves (30-YR/2-YR & 10-YR/2-YR) major trends as of 18 Jul 2025 (Source: TradingView, click to enlarge chart)

Fig 5: Japan 225 CFD Index medium-term & major trends as of 18 Jul 2025 (Source: TradingView, click to enlarge chart)

A steepening of the JGB yield curves (30-year minus 2-year and 10-year minus 2-year) coupled with supportive fundamentals, as highlighted earlier, is likely to create another tailwind for the Nikkei 225.

The major bullish breakout (steepening conditions) of the JGB yield curves since June 2022 has a direct correlation with the movements of the Nikkei 225, and the major uptrend phases of the JGB yield curves remain intact so far, in turn, may trigger a positive feedback loop into the Nikkei 225 (see Fig 4)

In addition, the daily time frame technical chart of the Japan 225 CFD Index has staged a bullish breakout from a bullish continuation flag configuration on Thursday, 17 July, after a retest on its rising 20-day moving average on Monday, 14 July (see Fig 5).

These observations suggest that a medium-term uptrend phase is evolving in the Japan 225 CFD Index. Watch the 39,190/38,730 key medium-term pivotal support zone for the start of a potential fresh impulsive up move sequence for the next medium-term resistances to come in at 40,620 and 42,500/890 (current all-time high and Fibonacci extension).

However, failure to hold at 38,739 invalidates the bullish scenario to kickstart a medium-term corrective decline sequence to expose the next medium-term support at 36,610.

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