Japan's benchmark Nikkei 225 index remained steady on Tuesday, hovering near its highest level since July 10, even as the country's second-quarter GDP growth fell short of expectations. The index traded at 68,935 points, up 14% from its July 29 low, as investors weighed softer economic data against a cautious rebound in the yen.
GDP growth slows, but stocks hold firm
According to Japan's statistics agency, the economy expanded at an annualized rate of 1.1% in the second quarter, missing the 2% forecast. The slowdown was attributed to soft domestic demand, which offset robust exports, and the lingering effects of the US-Iran conflict on global trade. In the first quarter, growth had come in at 2.1%. The Bank of Japan (BoJ) projects full-year growth of 0.6% for 2025, up from 0.5% in 2024.
The weaker GDP reading puts additional pressure on the BoJ, which faces a delicate balancing act. Inflation remains elevated, partly due to higher crude oil prices stemming from the US-Iran war, while the yen has retreated to multi-year lows. The central bank has kept its policy rate at 1%, while the US Federal Reserve's rate range stands at 3.50%–3.75%, creating a wide interest rate differential that continues to attract carry trades.
AI boom lifts Japanese tech stocks
Despite the macroeconomic headwinds, Japanese equities have been buoyed by the ongoing artificial intelligence (AI) boom. SoftBank Group's stock has climbed 30% this year, driven by its AI investments in companies like OpenAI and Intel. Kioxia Holdings, a major memory chip manufacturer, has surged 418% year-to-date and 170% over the past six months, as the global memory shortage persists. Tokyo Electron and Advantest, both key players in semiconductor equipment, have also been among the top gainers.
The AI-driven rally has been a key support for the Nikkei, with technology stocks leading the charge. As noted in a recent analysis of the Nikkei's bullish flag pattern, the index's upward momentum is closely tied to the performance of these tech heavyweights.
Yen rebounds on intervention hopes
The USD/JPY pair pulled back to 159, a few points below last week's high of 159.6, as traders speculated about potential intervention by the BoJ. However, any intervention may prove limited in scope due to the substantial rate differential between the US and Japan. Unless that spread narrows, the dollar is likely to remain in demand relative to the yen.
The yen's movement has a direct impact on Japanese stocks: a weaker yen benefits exporters, while a stronger yen pressures importers. The current cautious rebound in the yen has been met with mixed reactions, as investors weigh the potential for official action against the fundamental drivers of the currency pair.
Technical outlook: bullish flag points higher
From a technical perspective, the Nikkei 225 has rebounded over the past few weeks and is now trading above the descending channel that formed part of a bullish flag pattern. The index is supported by the 50-day exponential moving average (EMA), indicating that bulls remain in control. The Relative Strength Index (RSI) has risen to 60 and is pointing upward, suggesting further upside potential.
If the current momentum continues, the index could target the year-to-date high of 72,870, reached in June. However, traders should monitor the yen's trajectory and any BoJ policy signals, as these could influence market direction. For context, similar dynamics have been observed in other Asian markets, such as the Kospi's recent rebound, where tech and AI demand have played a pivotal role.
As the global AI trade persists, Japanese equities may continue to benefit, but the interplay between currency moves and monetary policy will remain a key risk factor. Investors are also watching upcoming earnings from major firms, including Klarna, for broader market sentiment.
This article is for informational purposes only and does not constitute financial advice.
