By The Nikkei 225 Index moved sideways as the Japanese yen retreated to its lowest level since September 7 and as traders predicted that the Bank of Japan (BoJ) and the Federal Reserve will hike interest rates in their meetings this week. Japan stocks are also reacting to the ongoing divisions on the future of the artificial intelligence (AI) industry.
Traders are betting on BoJ and Fed hikes
Japan stocks are wavering today as investors focus on the upcoming interest rate decisions by the Federal Reserve and the Bank of Japan.
Traders are unanimous that Kevin Warsh and the team will deliver the first interest rate hike of this year. If this happens, it will bring interest rates to between 3.75% and 4%, the highest level in a year.
The Fed is expected to hike rates to deal with the elevated inflation that has remained above the 2% target in over five years. That move will lead to renewed tensions between the bank and the White House, with Trump favoring aggressive cuts.
Traders are also predicting that the Bank of Japan will hike interest rates by 25 basis points on Friday this week. A CNBC poll showed that over 90% of economists see the bank hiking rates to 1.25%, the highest level in over three decades.
That move will signal an acceleration of the hiking cycle since the bank delivered its last rate hike in June this year. The most recent data showed that Japan’s headline inflation rose to 1.9% in July as energy prices rose.
In theory, the tightening of monetary policy in the US and Japan should be bearish for the Nikkei 225 Index since it would push debt-servicing costs higher for longer. However, the upcoming rate hikes have already been priced in, so, investors will likely react to the language that Kevin Warsh and Kazuo Ueda makes.
Rising bond yields and AI jitters
The Nikkei 225 Index is also reacting to the rising bond yields in the US and Japan. In Japan, the ten-year yield rose to 3.03%, its highest level in decades. It has been in a steady increase in the past few months.
The same is happening in the United States, where the ten-year has crossed the 5% milestone. Higher bond yields often drive investors away from the stock market.
Traders are also focusing on the AI slowdown jitters as leaders in key companies like OpenAI and Anthropic call for the industry to slowdown. Softbank and Kioxia stocksdropped by 1.53% and 3.71% today, while Tokyo Electron and Advantest rose by over 1%.
Analysts are divided on the impact of the AI safety fears on the industry. Some believe that the fears are overblown and that spending will continue accelerating this year.
Nikkei 225 Index technical analysis
NI225 Index chart | Source: TradingView
The Nikkei 225 Index has some highly bearish technicals. It has already moved below the 50-day Exponential Moving Average (EMA), a sign that bears have prevailed.
The index has also remained below the Supertrend indicator. It has formed a symmetrical triangle whose two lines are about to converge, while the Relative Strength Index (RSI) has drifted downwards.
Therefore, the most likely scenario is where it continues falling, with the next key target being at 62,000.
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