The bulls reemerge to push the NKY225 index above 35,000 mark – London Business News | Londonlovesbusiness.com

After Monday’s circuit breaker, the bulls have reemerged in the NKY225 over the past two days, attempting to push the index back above the 35,000 mark.

Despite this, I firmly believe that Japanese stocks are still on a bearish trajectory.

The significant sell-off in the NKY225 at the start of this week can be attributed to two primary factors: the looming threat of a US economic recession and the massive unwinding of yen carry trades.

There’s a prevailing belief that Japan’s monetary tightening will persist and that the Fed will need to cut rates soon to save the market.

With strong expectations of a narrowing US-Japan interest rate differential, the yen is appreciating, which is putting downward pressure on Japanese stocks like a heavy weight on a seesaw.

Even though Japan’s June real wages rose by 1.1% YoY, which momentarily boosted consumer confidence and Japanese stock prices, I see this as a short-term effect. Unless the economic data shows sustained improvement, the yen’s strength will continue to be a major negative factor for the NKY225.

While the bearish outlook on Japanese stocks is quite clear to me, I’m holding off on increasing my positions for now. Although the NKY225 VIX has dropped from Monday’s extreme level of 70% to 50%, volatility remains excessively high.

Over the past year, the VIX has typically ranged between 16% and 23%. High volatility means that price swings can occur without any significant news, and these intraday fluctuations are likely to lack sustainability, making it difficult to determine a clear trading direction.