The Nikkei 225 Index rallied by over 1% on Monday after Japan published weak GDP numbers and as traders remained optimistic about the upcoming US and China trade talks. It jumped to a high of ￥38,137, up by over 23% from its lowest level in April, meaning it is in a technical bull market.
Japan GDP data
The Nikkei 225 Index, which tracks the biggest Japanese companies, rose after the country published the second estimate of GDP data.
These numbers showed that Japan’s GDP contracted by 0.2% in the first quarter after growing by 2.2% in Q4. It stagnated at 0% on a QoQ basis after growing by 0.6% in the previous quarter.
Japan attributed the slowdown to weak external demand, which contracted by 0.8% during the quarter. This slowdown was offset by a 3.3% increase in private consumption and a 1.1% jump in capital expenditure.
These numbers mean that the Bank of Japan (BoJ) will be cautious about interest rates. It has already delivered three interest rate hikes since 2024, and officials have hinted towards more as inflation remains sticky. With the economy slowing, it is possible that Japan will hold interest rates steady, benefiting Japanese stocks. A Bloomberg analyst said:
“The narrower contraction in Japan’s first-quarter GDP compared with the preliminary reading doesn’t change the broader picture — fragile growth complicates the Bank of Japan’s path toward policy normalization.”
Japan’s GDP led to lower government bond yields, with the ten-year falling to 1.48%, down from this month’s high of 1.588%. The Japanese yen also remained in a tight range, with the USD/JPY pair trading at 144.80.
US and China trade talks
The Nikkei 225 Index is also rising as investors look forward to the upcoming trade talks between China and the United States in London.
This meeting comes a month after the two sides met in Switzerland and agreed to ease tensions that have been lingering in the past few months.
The first meeting led to some concessions, including lowering tariffs from triple digits to double digits.
A trade deal between the US and China would be a good thing for most stocks, including those in the Nikkei 225 Index.
For one, a deal would raise the possibility of the US and Japan reaching a trade agreement that leads to lower tariffs on goods entering the US. It would also remove one of the factors clouding the world economy.
The other top catalyst for the Nikkei 225 Index will be the upcoming US inflation data on Wednesday. This is an important report that may impact the next actions by the Federal Reserve. A lower-than-expected inflation figure will be good for the Nikkei 225 Index and other global stocks as it will increase the odds of Fed cuts.
Most Nikkei 225 Index companies rose on Monday, with Otsuka Holdings, Advantest, SoftBank, Recruit, Fujitsu, Fujikura, and Mitsubishi Electric being the top gainers.
Read more: Here’s why Hong Kong’s Hang Seng Index is going up
Nikkei 225 Index analysis
Nikkei Index chart | Source: TradingView
The daily chart shows that the Nikkei 225 Index has staged a strong recovery in the past few weeks, moving into a bull market. It bottomed at ￥30,802 in April and then bounced back to ￥38,000.
The index has jumped above the 50-day and 100-day Exponential Moving Averages (EMA), a sign that bulls are in control for now.
It has also formed an inverse head and shoulders pattern, a popular bullish reversal sign.
Therefore, a move above the neckline at ￥38,550 will validate the H&S pattern and point to more gains, potentially to last year’s high of ￥42,390. A drop below the support at the 200-day EMA at ￥37,440 will invalidate the bullish outlook.
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