Will the Nikkei 225 sustain its momentum into 2026?
In the short term, asymmetric downside risk warrants more conservative stop losses in trading setups
[SINGAPORE] 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 of Nov 5, 14:30 SGT, the Nikkei 225 stood at 50,212, down 2.50 per cent on the day but still up +25.86 per cent year to date in JPY terms after a strong +16.63 per cent rally in October. The sell-off was likely driven by an overnight slump in US Tech, with AMD’s mixed earnings report weighing on investor sentiment across global semiconductor names.
Adding to the cautious tone, several Wall Street CEOs, including Morgan Stanley’s Ted Pick and Goldman Sachs’ David Solomon, warned of a possible equity drawdown of more than 10 per cent in the next 10 to 12 months, while Capital Group’s Mike Gitlin mentioned stretched valuations despite strong corporate earnings.
Furthermore, Michael Burry, the fund manager known for The Big Short, disclosed bearish puts on Palantir and Nvidia In post-market trading. The Nikkei 225’s heavier tech weighting (~55 per cent versus the S&P 500’s 36 per cent) exacerbated the decline, with semiconductor firms like Tokyo Electron and Advantest leading losses.
Nevertheless, absent a sustained drawdown, we expect the Nikkei 225 to maintain its uptrend towards the end of the year.
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New leadership in Japan
The rally in the past month coincided with Sanae Takaichi’s appointment as Japan’s first female Prime Minister and president of the Liberal Democratic Party (LDP). As a long-time advocate of “Abenomics”, Takaichi is expected to pursue expansionary fiscal and monetary policies, which the market views as broadly positive.
Takaichi previously drew attention back in September when she said that it would be “stupid” to raise interest rates and that a weak yen has many upsides in addition to downsides. This rhetoric has led to the yen weakening against the US dollar. A weaker yen, which benefits Japanese exporters, also contributed to the Nikkei 225’s October surge.
Takaichi has also ordered a fresh package of economic measures to address the cost of living crunch, labelling it as a top priority, backed by a supplementary budget due by year-end, and a new long-term growth strategy targeted for mid-2026.
Catalysts behind the bull run
Improved trade sentiment has also underpinned Japanese equities. Late-stage US-China negotiations helped ease trade concerns, while moderating inflation data also indicated that tariff-related passthroughs are more modest than feared. A new Japan-US deal to lower and cap tariffs on auto exports in exchange for a US$550bn investment pledge further supported optimism.
Domestically, both the Tokyo Stock Exchange and the Japanese government have been pressing companies to improve shareholder returns. Tactics range from share buybacks to more unconventional efforts, such as gift distributions at Annual General Meetings, to cultivate retail-investor loyalty. Heightened shareholder activism is also compelling management teams, long criticised for cash hoarding, to deliver credible growth strategies.
Nikkei 225 outlook
In our view, we see the Nikkei 225 currently hovering close to fair value, with further upside largely dependent on Takaichi’s upcoming economic package. While systemic risks have narrowed, policy missteps in the US or renewed geopolitical tensions could still unsettle markets in 2026. Corporate earnings will likely take centrestage as the differentiator for stock performance. With the Nikkei 225 trading at fresh all-time highs, we believe that much of the good news could already be priced-in, leaving little margin for error.
In Japan, key policy milestones to monitor include the earlier mentioned year-end budget allocation and Takaichi’s long-term growth strategy in mid-2026. Currency swings, particularly a stronger yen, remains a key risk. Bank of Japan governor Kazuo Ueda Ueda did not rule out hiking rates despite ongoing budget preparations while Toyota estimates that every one yen move in USD/JPY shaves roughly 50 billion yen (S$424 million yen) from operating profit.
From a valuation perspective, the Nikkei remains appealing, trading at an approximate 21 per cent discount to the S&P 500 (TTM P/E 23.4x vs 28.5x) and just below its own five-year average of 24.5x. Structural supports such as artificial intelligence-related growth, corporate governance reforms, cross-holding unwinds, Nippon Individual Savings Account inflows, and active shareholder engagement continue to underpin Japan’s long-term equity story.
Nikkei 225 technical outlook
On the Osaka Nikkei 225 Mini Futures, the contract has rallied from its April low of 30,650 yen, to test the 51,120 yen mark (200 per cent Fibonacci extension) before the Nov 5 tech-led sell-off.
The 50-day moving average remains above the 200-day average, confirming a bullish setup, while the 14-day RSI at 60 suggests that the market is slowly approaching overbought territory.
We expect a potential re-test of the key support levels at 48,704 yen (176.4 per cent Fibonacci extension), with a deeper floor at 47,210.23 yen (161.8 per cent Fibonacci extension).
A well-received economic package could, however, lift the index back towards the 51,120 yen level (200 per cent extension) and potentially even higher at 53,535 yen (223.6 per cent extension).
However, in the short term we remain cautious of asymmetric downside risk, as markets appear more vulnerable to a larger drawdown than a rebound to test all-time highs. We believe this asymmetric risk warrants more conservative stop losses in trading setups.
The writer is senior investment analyst at Phillip Nova
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