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The Nikkei 225 Index dropped for three consecutive days, reaching a low of ¥60,910, its lowest level since May 7 this year. It has pulled back from this month’s high of ¥63,760 as crude oil prices drop, and Japan bond yields jump.
Japan stocks drop as crude oil prices jump
The Nikkei 225 and Topix indices retreated for the third consecutive day as crude oil prices jumped. Brent, the global benchmark, rose to $113, while the West Texas Intermediate (WTI) rose to $110.
These benchmarks jumped after President Donald Trump threatened Iran that time was running out. In a short interview with Axios, he warned that the “clock is ticking” before the US launches harder strikes.
Trump and his advisors hope that a devastating attack would push Iran back to the negotiating table.
However, the reality is that such an attack would lead to a prolonged and more dangerous war. For one, US media reports suggest that Iran has reconstituted its military operations and is now fully armed.
Iran has also warned that it will launch a more severe attack on regional oil infrastructure. It may also threaten traffic in the Red Sea, which is within the range of its missiles.
Japan is highly exposed to these developments because it is a net importer of oil. Also, data shows that Japan’s oil inventories have continued dropping this year. Weekly oil inventories dropped by 275 million liters, a trend that may continue.
Soaring Japanese government bond yields
The Nikkei 225 Index is also slipping as Japanese government bond yields jump as investors predict that inflation will remain at an elevated level.
Analysts also warn that these yields are a sign of fiscal worries in the country. Besides, Japan has over $8.58 trillion in debt, giving it a debt-to-GDP ratio of 250%.
Data show that Japan’s 10-year yield jumped to 2.77%, while the 5-year yield soared to 2.01%. The 30-year yield has soared to 4.19%, the highest level on record.
Japan bond yields | Source: TradingView
These numbers are concerning. For one, the spread between the US and Japanese bond yields has continued to narrow. This may lead to more repatriation of cash to the high-yielding Japanese bonds.
It is also concerning because it means that corporate Japan will now need to pay higher interest rates for their debt. At the same time, there are concerns that the Bank of Japan will need to hike interest rates again.
Nikkei 225 Index technical analysis
Nikkei Index chart | Source: TradingView
The daily chart shows that the Nikkei 225 Index soared to a record high of ¥63,805 last week and then pulled back to the current ¥60,937.
A closer look shows that the rebound happened after it formed a cup-and-handle pattern whose upper side is at ¥59,462.
Therefore, there is a likelihood that the ongoing retreat is part of the break-and-retest pattern. This is a situation where an asset breaks above a key resistance and then retests it. It is a common bullish continuation sign in technical analysis.
Therefore, the price will likely retest the support at ¥59,462 and then bounce back. If this happens, it may retest the key resistance level at ¥63,805 and move above it.
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