Japan’s stock market has faced intense pressure recently, but several indicators suggest that the decline may soon pause. After a sharp four-day sell-off triggered by geopolitical tensions and rising oil prices, the Nikkei 225 could stage a short-term rebound supported by technical signals and changes in Japan’s bond market.
While the global market environment remains uncertain—especially following the escalating US‑Iran War—some market indicators now point toward the possibility of a modest recovery in Japanese equities.
Oil Shock Triggered the Recent Sell-Off
The recent downturn in the Nikkei 225 has been largely driven by surging energy prices.
Since the start of the US-Iran conflict, the index has dropped around 6.1% in just four trading sessions, making it one of the worst-performing major global stock indices during this period.
The reason is simple: Japan relies heavily on imported energy, particularly oil. When global oil prices spike, the country’s economy faces multiple pressures, including:
- Higher import costs
- Increased inflation
- Reduced corporate profitability
- Slower economic growth
This combination raises fears of stagflation, a situation where economic growth slows while inflation remains high. Markets tend to react negatively to such scenarios, explaining the rapid decline in Japanese equities.
However, despite these concerns, several financial indicators suggest the sell-off may be overextended in the short term.
A Changing Yield Curve Could Support Stocks
One key factor that could help stabilize Japanese stocks is the movement of the Japanese government bond (JGB) yield curve.
Specifically, investors are watching the spread between 10-year and 2-year JGB yields.
A bull steepening of the yield curve—where long-term yields rise relative to short-term yields—often signals improving expectations for economic growth and tends to support equity markets.
Recent movements in the yield curve suggest that traders believe the Bank of Japan may adopt a less aggressive stance on interest rate hikes.
Bank of Japan Policy Expectations
Since exiting its ultra-loose monetary policy in 2024, the Bank of Japan has gradually increased interest rates.
So far, the central bank has implemented four rate hikes, bringing the current policy rate to 0.75%.
Market forecasts suggest that by the end of 2026, the rate could reach between 1.0% and 1.25%, depending on economic conditions.
However, recent developments—including rising oil prices and geopolitical tensions—may encourage the central bank to slow or temporarily pause its tightening cycle.This shift in expectations has already started affecting bond markets.
Falling Short-Term Yields Signal Changing Expectations
Short-term bond yields often reflect market expectations for central bank policy.
Japan’s 2-year JGB yield surged to a 30-year high of 1.31% in February 2026 following the Bank of Japan’s previous rate hike and the election victory of Sanae Takaichi’s coalition government.
Since then, however, the yield has declined slightly to around 1.24%, forming what technical analysts call a “lower high.”
This move suggests that investors now expect less aggressive monetary tightening in the coming months.
At the same time, the 10-year minus 2-year yield spread has begun widening again, rebounding from 0.84% to roughly 0.92%.
Historically, this type of yield-curve steepening has often coincided with short-term rallies in the Nikkei 225.
Technical Indicators Suggest a Possible Bounce
Beyond macroeconomic factors, technical analysis also supports the possibility of a short-term recovery.
The Nikkei 225 recently tested its 50-day moving average, a key support level that often acts as a turning point during market corrections.
So far, the index has managed to hold this support zone, which suggests buyers are stepping in.
Key Support Levels
The most important support area currently sits between:
- 54,100
- 52,960
This range has acted as a strong medium-term support zone.
If the index continues to hold above this level, it could trigger a rebound.
Key Resistance Levels to Watch
For a recovery to gain momentum, the Nikkei 225 must break above 56,530.
A move above this level could open the door for a short-term rally toward:
- 57,140 – near the 20-day moving average
- 58,140 – the next major resistance level
Such a move would represent a technical relief rally after the recent sharp decline.
What Could Invalidate the Bullish Scenario?
Despite the positive signals, risks remain.
If the Nikkei 225 falls below 52,960, the current rebound scenario would likely fail.
In that case, the index could enter a multi-week downtrend, with potential downside targets near:
- 52,960
- 52,260
Continued escalation in the US-Iran conflict or further spikes in oil prices could accelerate such a move.
Momentum Indicators Are Turning Positive
Momentum indicators also suggest a possible shift in market sentiment.
The Relative Strength Index (RSI) recently broke above a downward trendline and moved above the 50 level, which is typically seen as a signal that bullish momentum is returning.
This change indicates that selling pressure may be fading, increasing the probability of a short-term bounce.
Read More: Crypto’s 24-Hour Promise Gets a Geopolitical Reality Check
FAQs
Why did the Nikkei 225 fall recently?
The decline was largely triggered by rising oil prices following the US-Iran conflict. Because Japan imports most of its energy, higher oil prices increase inflation and economic risks, putting pressure on stocks.
What is the Nikkei 225 index?
The Nikkei 225 is Japan’s primary stock market index, tracking 225 major companies listed on the Tokyo Stock Exchange. It is often compared to the Dow Jones Industrial Average in the United States.
How does the yield curve affect the stock market?
A steepening yield curve often signals improved economic expectations or looser monetary policy. Historically, such shifts have supported equity market recoveries.
What role does the Bank of Japan play in this situation?
The Bank of Japan controls interest rates and monetary policy. If the central bank slows or pauses rate hikes, borrowing conditions remain easier, which can support stock prices.
Is the Nikkei 225 expected to recover fully?
Current indicators suggest only a short-term rebound for now. Long-term performance will depend on global energy prices, geopolitical stability, and Japan’s economic outlook.
Conclusion
Although the Nikkei 225 has experienced a sharp decline due to geopolitical tensions and rising oil prices, several indicators now point toward a potential short-term recovery. A steepening Japanese yield curve, expectations of a less aggressive Bank of Japan, and supportive technical signals suggest the market may attempt a modest rebound.However, the broader outlook remains uncertain. Continued volatility in energy markets and geopolitical developments could quickly change the market’s direction. For now, investors are closely watching key technical levels and policy signals that could determine whether this bounce becomes a sustained recovery or merely a temporary pause in the downtrend.
