Nikkei 225 and Topix indices form a risky pattern amid tariff risks

The Nikkei 225 index remained on edge after Japan published mixed trade numbers on Wednesday morning. It was trading at ¥38,225, where it has been in the past few days. It remains about 5.2% below the highest level this month and 10% lower than the year-to-date high. 

Similarly, the TOPIX index was trading at ¥2,700, down from this month’s high of ¥2,770 and the year-to-date high of ¥2,946. 

Japan exports and imports data

The Nikkei 225 and Topix indices reacted mildly to the latest trade numbers from Japan. In a report, the statistics agency said that the country’s exports rose by 3.1% in October, higher than the median estimate of 2.2%. This was a big turnaround since exports dived by 1.7% in the previous month. 

Imports rose by 0.4% in October, also higher than the expected drop of 0.3%, but lower than September’s increase of 1.8%. 

These numbers led to a wider trade deficit in Japan. The country reported a trade deficit of ¥461.2 billion, higher than the ¥294 billion it had in September. The deficit was also wider than the expected ¥360 billion.

Japan’s trade numbers are important for the Nikkei 225 index because some of the largest names sell their products abroad. The most notable ones are the likes of Toyota, Nissan, Honda, and Mitsubishi. 

Investors are waiting for more information on Trump’s approach on tariffs and the impact on the Japanese economy. He selected Cantor Fitzgerald to be the next head of the Commerce Department, a move that raises more risks on tariffs. Howard Lutnick believes that imposing such tariffs would help to spur local manufacturing, a claim that many analysts reject. 

The US and Japan have a large trade relationship. In 2023, the two countries did trade worth over $223 billion. The US exported goods worth over $121 billion and imported $184 billion. As such, there is a risk that the US will target Japan in a bid to lower the deficit.

A report released earlier this week showed that Japan’s machinery orders dropped by 4.8% YoY in September, missing the expected increase of 2.2%. Core orders fell by 0.7% on a month-on-month basis during the month.

The Nikkei 225 index has also reacted to the actions of the Federal Reserve and the Bank of Japan. The Fed slashed rates by 0.25% in its last meeting and signaled that more of them were coming. In Japan, the BoJ has maintained rates steady as investors rule out more cuts.

Most companies in the Nikkei 225 index were barely changed on Wednesday. Sompo Holdings shares jumped by 12%, while Tokyo Gas, Seven & I, Konica Minolta, Japan Steel Works, and Sony were some of the top gainers in the index. 

Meanwhile, Tokio Marine, T&D Holdings, Sumitomo Osaka Cement, Nissan Motor, and Mazda Motor were some of the top laggards. 

Nikkei 225 index analysis

The daily chart shows that the Nikkei 225 index formed a double-top pattern at ¥40,145. In most periods, this is a highly popular bearish patterns in the market. 

The Nikkei 225 index has moved below the 50-day and 100-day Exponential Moving Averages (EMA), signaling that bears are in control. It has formed a bearish flag chart pattern, while the MACD indicator has moved close to the zero line. The Relative Strength Index (RSI) has moved slightly below the neutral point at 50.

Therefore, the Nikkei 225 index will likely have a bearish breakout in the coming days. If this happens, the next point to watch will be at ¥36,000. A move above the resistance at ¥40,144 will invalidate the bearish view.

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