Nikkei 225 bullish momentum expected to continue but downside risks seen

THE Nikkei 225 Index Futures, traded in standard, mini, and micro contracts, is a derivative instrument based on Japan’s flagship equity benchmark, the Nikkei 225 Index.

The top three constituents by weight are Advantest (semiconductor testing solutions), Softbank (multinational investment holding company), and Fast Retailing (Uniqlo). As at market close on Apr 22, the contract reached an all-time high of 60,110 on Apr 20, buoyed by optimism surrounding de-escalation in the US-Iran War. This came after reports that Iran had declared the Strait of Hormuz “completely open”. However, tensions around the Strait of Hormuz have re-escalated after the US seized an Iranian-flagged vessel.

US President Donald Trump subsequently extended the ceasefire with Iran indefinitely, hours before it was set to expire, to allow for continued peace negotiations, even as plans for a fresh round of talks between the two countries fell apart.

Prior to the Iran war, Japanese equities saw an exceptional post-election rally following Prime Minister Sanae Takaichi’s decisive election victory, which saw her attaining a supermajority with 316 seats, significantly higher compared to her predecessors.

Markets viewed her win positively, expecting it to allow for clearer policy direction. This comes alongside fiscal measures supporting households through energy subsidies, tax relief and targeted support, including a proposed temporary zero consumption tax on food.

At the same time, Takaichi’s administration has reiterated its priority to invest in strategic sectors such as artificial intelligence, semiconductors, defence, nuclear energy, quantum technologies and next-generation batteries.

This post-election surge saw the Nikkei 225 trading at around 23 times expected earnings over the next 12 months, well above its 10-year historical average of around 18.6 times. This places it close to the Nasdaq 100’s 23.3x multiple, according to Bloomberg data. As reported by the International Monetray Fund, Japan’s public debt-to-nominal GDP ratio has significantly decreased from 258.4 per cent in 2020 to 229.6 per cent in 2025. If the Takaichi administration’s growth strategy functions effectively, it is expected to further accelerate this fiscal improvement.

Due to the Iran war, markets have pared expectations for a rate hike by the Bank of Japan. The government has also tapped oil reserves and is seeking alternative supply sources. A weaker yen boosts the repatriated earnings of Japan’s major exporters, such as auto and machinery manufacturers.

Reforms by the Tokyo Stock Exchange have accelerated, pressuring companies to improve capital efficiency, increase dividends, and conduct share buybacks.

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In our view, we see continued upside for the Nikkei 225, although it remains largely dependent on the developments in the US-Iran crisis and the trajectory of oil prices. Volatility and uncertainty will likely persist until there is clearer evidence of stable shipping flows through the Strait of Hormuz again.

Outside of geopolitics, AI remains a key structural growth driver. The Nikkei 225 is highly senstive to the tech sector which accounts for roughly 54 per cent of its weight, well above the S&P 500’s 35 per cent. AI-related companies such as Furukawa Electric, Kioxia, Fujikura, and Ibiden have led gains year to date. Unlike the US, Japan’s AI exposure is more industrial and hardware-driven, particularly in semiconductor materials and manufacturing equipment, where companies like Tokyo Electron, Ibiden, Shin-Etsu, Sumco, Advantest, and Disco all have dominant market shares.

Despite the recent rally, the Nikkei 225 remains relatively undervalued compared to other major developed benchmarks. Forward earnings estimates continue to trend upwards, as the return of inflation makes it easier for investors to price in steadier earnings growth.

Ultimately, Japanese equities will likely see global inflows as it remains a viable alternative for global investors looking to diversify away from US-heavy portfolios.

Nikkei 225 technical outlook

The Osaka Nikkei 225 Mini Futures saw a sharp rally from April 2025, before declining during the escalation of the Iran War in February 2026. Nevertheless, the contract has since rebounded, erasing much of its earlier losses.

Based on a Fibonacci extension drawn from the April 2025 low to the pre-war high and March 2026 low, the contract is currently hovering between the 38.2 per cent and 23.6 per cent extension level of around 61,525 yen and 57,280 yen respectively.

Given current market sentiment, we expect the contract to test resistance at 61,525 (38.2 per cent extension), with support at 57,280 yen (23.6 per cent extension). The Moving Average Convergence Divergence indicator (MACD) shows a bullish crossover signal, represented by the MACD line trending above the signal line. The MACD histogram is also in positive territory, indicating bullish momentum.

A return of shipping activity in the Strait of Hormuz and cooling in geopolitical tensions could lift the contract further upwards towards the 65,000 yen level (50 per cent extension) and potentially even higher at 68,380 yen (61.8 per cent extension). However, we remain cautious over downside risk in the near term, as markets appear vulnerable given the recent run-up. We believe this asymmetric risk warrants more conservative stop losses in trading setups.

The writer is senior investment analyst at Phillip Nova