Nikkei 225: A gradual interest rate hike stance by BoJ maintains the bullish trend
Key takeaways
BoJ policy supportive for equities: The BoJ’s expected 25bp hike to 0.75% and guidance for a gradual, data-dependent tightening path into 2026 signal policy normalization without destabilising financial conditions, reducing downside risks for Japanese equities.
Stronger JPY no longer a headwind: Domestic-oriented Nikkei 225 stocks are outperforming export-heavy names, indicating that modest JPY strength and improving consumer confidence can coexist with a sustained equity uptrend.
Technical backdrop constructive: The Nikkei 225 is showing signs of a minor bullish reversal after a shallow pullback, with momentum indicators improving and key supports holding, suggesting limited risk of a major corrective decline.
The Bank of Japan (BoJ) has hiked its overnight policy rate by 25 basis points (bps) to 0.75% on Friday, 19 December 2025, as expected, its highest level in 30 years.
In its policy statement, the BoJ said it will continue raising the policy rate as long as economic activity and inflation evolve in line with its projections, signalling a conditional bias toward further tightening. Policymakers noted that the probability of achieving the baseline outlook has increased, underscoring growing confidence that inflation is becoming more entrenched rather than transitory.
The BoJ also reaffirmed its commitment to achieving the 2% inflation target in a sustainable and stable manner, while guarding against overly aggressive tightening that could disrupt financial conditions. Officials highlighted that wages and prices are expected to rise at a moderate and coordinated pace, reinforcing the view that inflation is increasingly underpinned by domestic demand rather than one-off cost shocks.
In essence, the BoJ is signalling its intention to continue a gradual rate-hiking path into 2026, with a clear emphasis on managing volatility in the Japanese Government Bond (JGB) market. Policymakers are wary that a rapid, one-way rise in 10-year and 30-year JGB yields could tighten financial conditions prematurely and undermine Japan’s economic growth prospects.
Markets now await further clarity from BoJ Governor Ueda’s press conference at 0630 GMT on how cautiously the BoJ intends to proceed into 2026 and beyond.
The Nikkei 225 advanced for a second straight session, up 0.8% intraday at the time of writing, rebounding after a four-day pullback that began on Friday, 12 December 2025.
We will now highlight several technical factors that support the BoJ’s current gradual and bit-sized monetary tightening policy, which, in turn, leads to a stronger JPY, and is unlikely to trigger a significant major corrective decline sequence in the Nikkei 225.
Gone are the days when a broad major bullish trend of the Nikkei 225 requires a weak JPY to support it.
Japan’s equities with high domestic exposure are outperforming exporters
A stronger JPY is likely to negate the current higher cost-of-living squeeze in Japan, in turn, further boosting consumer confidence, which leads to an increase in domestic spending.
Within the Nikkei 225, stocks with a higher reliance on domestic Japanese sales are outperforming export-heavy names, particularly technology equipment and automobile manufacturers with greater overseas exposure.
Since 9 December 2025, the Nikkei 225 Domestic Exposure 50 Index (domestic sales) has outperformed the Nikkei 225 Global Exposure 50 Index (international sales), where its ratio jumped by 5.4% as of Thursday, 18 December 2025 (see Fig. 1).
Hence, this observation supports the view that a gradual BoJ rate-hiking cycle is unlikely to trigger a major corrective decline in the Nikkei 225.
Preferred trend bias (1-3 days) of Nikkei 225 – Minor bullish reversal in progress
Watch the 49,130 short-term pivotal support on the Japan 225 CFD Index (a proxy of the Nikkei 225 futures), and a clearance above near-term resistance of 49,850 (also the 20-day and 50-day moving averages) is likely to reinforce a potential minor bullish reversal towards the next intermediate resistances of 50,490 and 50,985 in the first step (see Fig. 2).
Key elements
- The recent 4-day decline has stalled at the 76.4% Fibonacci retracement of the prior minor bullish impulsive up move sequence from 21 November 2025 low to 12 December 2025 high.
- The hourly RSI momentum indicator has continued to flash bullish momentum conditions since the emergence of a bullish divergence signal on 18 December 2025 at its oversold region.
Alternative trend bias (1 to 3 days)
A break below 49,130 invalidates the bullish bias on the Japan 225 CFD Index to expose the 48,450 key medium-term pivotal support next.
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