The Nikkei 225 index and USD/JPY exchange rate bounced back on Monday as investors refocused on next week’s Bank of Japan (BoJ) interest rate decision. The index, which tracks the biggest Japanese companies, rose to over ¥32,790, higher than last week’s low of ¥32,191.

Meanwhile, the Japanese yen rose to a high of 146.20, much higher than last week’s low of 141.63. The lowest point last week was its lowest point since August 7th this year. It had slipped by more than 6.7% from the highest point in 2023.

The Nikkei 225 and USD/JPY have been in the spotlight in the past few months as investors assessed the next actions by the Bank of Japan. Some analysts predicted that the bank would start hiking interest rates in the coming meetings in a bid to boost the tumbling yen.

However, according to Bloomberg, the bank saw no need to end negative interest rates that have been in place since 2016. Some analysts were expecting the bank to either start hiking rates in its meeting next week. 

Others believe that the bank could have a hawkish pause, where it leaves them unchanged and points to a hike in 2024. The hopes of a hawkish tone explain why Japan stocks pulled back while the Japanese yen rose recently.

The BoJ will review some key events and data towards its interest rate decision set for December 19th. It will react to key developments in the United States, where the statistics agency will publish the latest inflation data and the Fed will deliver its decision. 

In Europe, the Swiss National Bank and European Central Bank (ECB) will also make their decisions. Most importantly, the BoJ will publish the final Tankan surveys of the year. These numbers will provide more information about the state of the Japanese economy.

Most Nikkei 225 index companies were in the green on Monday. Tokyo Electric shares jumped by more than 14% while Mitsui Electric, Chibu Electric Power, and Keisei Electric were among the best performers. Other notable gainers were companies like Tokyo Gas, Eneos Holdings, and Sumitomo.

Turning to the daily chart, we see that the Nikkei index has moved sideways in the past few months. In this period, the stock has formed a triple-top pattern around ¥33,800. In price action analysis, this is one of the most bearish patterns in the market. The index is also between the 50-day and 25-day moving averages.

Therefore, there is a likelihood that the Nikkei 225 index will resume the downtrend ahead of the BoJ decision. If this happens, it will likely retest the psychological level at ¥32,000.

USDJPY chart by TradingView

The USD/JPY exchange rate plunged to a low of 141.63 on Thursday last week. This price was a few points below the 38.2% Fibonacci Retracement level on the daily chart. It has now bounced back in the past two days and is at the 23.6% retracement point. 

The pair’s price action is happening ahead of Tuesday’s US inflation data and Wednesday’s FOMC decision. Therefore, this rebound seems like a dead cat bounce, which happens after an asset drops sharply. It could retreat and retest last week’s low at 141.63.

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