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Japan’s stock market has enjoyed a strong rally, but momentum is cooling as investors pause to take stock. A stronger yen and softer domestic data are tempering sentiment, yet the overall trend remains positive, with September likely to bring a mix of caution and opportunity.
Japanese equities pause after record-setting rally
The Nikkei 225 ended Friday lower at 42,718.47, as investors locked in gains on the final trading day of August.
Despite the pullback, the benchmark index still recorded a monthly rise of over 4%, touching a record high of 43,876.42 earlier in the month.
The broader Topix index also eased by 0.47% to 3,075.18, though it managed a monthly advance of 4.49%, reflecting the resilience of Japanese equities amid the wider global risk-on sentiment.
Profit-taking was fuelled by a stronger yen, which erodes exporters’ overseas earnings, alongside weaker-than-expected domestic economic data.
Factory output for July contracted more sharply than anticipated, while retail sales rose only modestly, missing analyst forecasts.
Automakers were among the hardest hit: Toyota declined 1.58%, Honda slipped 1.29%, while tech and consumer shares also softened.
Tokyo Electron edged down 0.41%, Sony lost 1.45%, and Nintendo dipped 0.89%. Out of the 225 Nikkei components, 152 ended lower, 68 advanced, and 5 closed unchanged.
Technical analysis
The Nikkei 225 has staged an impressive rally from its April low of around 30,397, climbing to a recent peak of 43,946 before easing back to near 42,711.
The index continues to trade above its 30-day moving average, confirming that the longer-term uptrend is intact.
However, shorter-term moving averages are starting to flatten, indicating that upward momentum may be cooling.
The MACD indicator is also showing early signs of weakness, with the histogram edging closer to neutral, signalling fading bullish momentum.
Picture: Nikkei 225 trades near 42,718, easing from a 43,946 peak, with support at 42,000 and resistance at 43,950, as shown on the VT Markets app.
Key resistance is located near 43,950. A decisive break above this level would open the door to further upside toward 45,000.
On the downside, initial support lies at 42,000, followed by a stronger base around 39,800, which has served as a major floor in recent months.
While the overall trend remains bullish, the index could see a phase of consolidation or a mild correction before attempting another move higher.
Cautious forecast
After a strong August, the Nikkei 225 forecast suggests the market may trade within a range of 42,000 to 43,500 in the short term as traders reassess valuations.
Continued yen appreciation could weigh on exporters, while lingering concerns over domestic demand may add pressure.
That said, solid corporate earnings are expected to act as a key buffer, particularly from firms with strong global exposure.
Foreign inflows also remain supportive, with Japan seen as a relatively stable market compared to other Asian economies facing sharper slowdowns.
Overall, while the pace of gains may cool, the fundamental backdrop remains positive, keeping the Nikkei on track for further advances into the final quarter of the year.
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