Downside risk looms for Nikkei 225

THE Nikkei 225 has experienced a strong upside since September 2019 after it broke the high of 22,372 in the second quarter of 2019. The strong move made Nikkei 225 the best-performing index in Asia, outdoing traditionally high growth equity markets like Hong Kong's Hang Seng Index and China's A50 index.

The Nikkei 225's rally is supported by various bright spots within the Japanese economy. Pending finalised fourth-quarter data, the Japanese economy is estimated to grow by 1.9 per cent (not finalised) in 2019. Inflation has also finally crossed the one per cent mark, eight years after the introduction of "Abenomics" in 2012.

However, there are some underlying conditions that threaten to halt the rally by the Nikkei 225. The sales tax hike introduced in the last quarter of 2019 has softened the economic outlook moving forward.