JPN225—Market Impact of the Bank of Japan's Policy Normalization and Trading Strategies

As JPN225 continues to hit new all-time highs, an unavoidable risk variable is accumulating—the process of the Bank of Japan's monetary policy normalization. If the previous rise of the Nikkei was largely benefited by a weak yen, then when the BOJ begins to tighten monetary policy substantially, will the underlying logic of this rally be shaken?

A deep analysis of the policy dilemma faced by the Bank of Japan is key to understanding the future trend of JPN225. Currently, Japan's core inflation rate has remained above the 2% target for three consecutive years, and spring wage negotiations have recorded salary increases of over 5% for two consecutive years, a situation unseen in the past thirty years. From the two core indicators of price stability and wage growth, Japan has the economic foundation for monetary policy normalization. Internal hawkish voices within the BOJ are gradually strengthening, with some members explicitly calling for a gradual reduction in bond purchases and further interest rate hikes in the meeting minutes.

If the BOJ announces a substantial reduction in government bond purchases at the upcoming meeting or hints at a second rate hike within the year, the yen could experience a strong appreciation rally. For JPN225, yen appreciation will directly impact the earnings expectations of export-heavy stocks like Toyota, Sony, and Hitachi, which have seen a significant portion of their recent performance growth come from exchange rate gains due to yen depreciation. It is estimated that for every 1 yen appreciation, the overall profitability of Nikkei 225 component companies could be reduced by about 0.5% to 0.8%. If the yen appreciates from the current around 150 to 140 or even 135, the impact on the index will be quite significant.

However, this does not mean the bull market in Japanese stocks will end here. On one hand, Japan's domestic economic recovery is shifting from export-driven to domestic demand-driven, with improvements in consumption and services partially offsetting the negative impact of exports. On the other hand, global investors' allocation to Japanese assets remains relatively low, and any short-term panic-driven declines could present a good opportunity for long-term capital to increase positions. The key lies in the pace—if the central bank acts too aggressively, short-term shocks are inevitable; if it adopts a gradual and well-communicated approach, the market will have enough time to digest.

From a technical perspective, the upward trend of JPN225 remains intact, but the weekly RSI has been in overbought territory for a prolonged period, indicating an objective need for technical correction. In trading, focus should be on market volatility before and after the BOJ meeting, looking for buying opportunities when the index pulls back to key moving averages, while setting stop-losses to guard against policy black swan events. What is your prediction for the BOJ's next move? Feel free to share your analysis.

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