Japan is a country where monetary policy is taken to the extreme. Despite inflation rising in Japan, the Bank of Japan (BOJ) did not tighten the monetary policy as other central banks did.
In fact, it did the opposite.
Therefore, it is fair to say that it won’t change the course now that the Federal Reserve of the United States has paused its tightening. Inflation cools in the United States and Europe, and no one should expect the BOJ to change its monetary policy if the inflation trend reverses.
The monetary policy divergence impacted both the local currency and the stock market. The Japanese yen is in a bearish trend while, at the same time, the local equity market keeps rising.
The Nikkei 225 index has broke higher recently after a years-long consolidation. While the bullish breakout may tempt some investors to take profit, it would be best to check the bigger picture first.
A quick look at the monthly timeframe reveals the true scale of this bullish breakout. Without a meaningful change in the BOJ’s policies, the path of least resistance remains the upside.
A pennant formation hints at a new high for Nikkei 225
A pennant is a bullish continuation pattern. It features a market rally and then a consolidation.
By the time the price action breaks out of the consolidation area, it is said to travel a distance similar to the one before the consolidation.
It means that if we project the measured move from the recent breakout, we have a target above 40,000 points for the Nikkei 225 index. Hence, a new all-time high is a true possibility given the price action, the technical picture, and the Bank of Japan’s monetary policy stance.
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