The Nikkei 225 Index retreated by over 1.2% on Tuesday, continuing a downtrend that has been going on in the past few days. It retreated to a low of ¥52,930, down from the year-to-date high of ¥54,515. This retreat may continue if the Bank of Japan (BoJ) maintains a highly hawkish tone as Citi expects.
Citi expects three BoJ rate hikes this year
The Nikkei 225 Index dropped by over 1.2%, mirroring the performance of other top global indices that slipped amid the rising geopolitical issues between the United States and Europe.
It also retreated after a report by Citigroup predicted that the BoJ would maintain a highly hawkish tone this year. The bank expects that the bank will deliver three rate hikes this year, a move that would push the benchmark rate from 0.75% to 1.50%.
Citi sees the bank hiking rates this high because of the deteriorating Japanese yen, which has been in a freefall in the past few months. The USD/JPY exchange rate rose to a multi-year high of 159.47, up by nearly 14% from its lowest level in 2025. A Citi analyst said:
“Put simply, the yen’s weakness is being driven by negative real interest rates. The BOJ has no choice other than to address this if it wants to reverse the exchange rate’s direction.”
The hawkish BoJ view has led to a surge in Japan bond yields. Data shows that the ten-year yield jumped to 2.32%, its highest level in decades and much higher than the pandemic low of minus 0.27%. The five-year yield has jumped to 1.70%, its highest point in years, while the 40-year soared to 4%
In most cases, the stock market tends to underperform when a central bank is highly hawkish and when bond yields are on a strong upward trajectory. Indeed, there are chances that Japanese institutions will start owning investments from abroad into fixed-income assets at home. This view will accelerate if the five-year and ten-year yield moves above inflation.
Japanese election ahead
Meanwhile, there is still uncertainty ahead of the upcoming Japanese election scheduled for February. Sanae Takaichi called the election so that she can get a proper mandate.
At the same time, her election pledges, including suspending a 8% food levy risks widening the fiscal gap and leading to higher bond yields. Indeed, yields have jumped sharply since she unveiled her $135 billion stimulus package.
On the positive side, Japan stocks may benefit from the upcoming Supreme Court decision on Donald Trump’s tariffs. Most analysts believe that the court will decide to end these tariffs, a move that will benefit Japanese companies that sell to the United States.
Nikkei 225 Index technical analysis
The daily timeframe chart shows that the Nikkei 225 Index has rebounded in the past few weeks, moving from a low of ¥48,160 in November to the current ¥52,990.
It is now aiming to retest the key support level at ¥52,656, its highest swing on November 4. A break-and-retest is one of the most common continuation signs in technical analysis.
Therefore, the index will likely remain in a tight range in the coming days and then resume the upward trend.
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