Nikkei consolidates after October fireworks: Bank of Japan rate hike looms

Nikkei stalls after historic October rally

The Nikkei225 has traded largely sideways during the first half of December after snapping its seven-month winning streak in November with a decline of around 4.1%. This followed a blistering 16.64% rally in October, marking its strongest monthly performance in decades.

October’s rally was turbocharged by expectations of new Prime Minister (PM) Sanae Takaichi’s aggressive push for expansionary and reflationary policies. Takaichi’s administration wasted little time, approving a landmark stimulus package on 21 November valued at approximately ¥21.3 trillion (around US$135 - 136 billion).

While the announcement provided a temporary lift, the market had largely rallied in anticipation of the package. Upside momentum was further stalled following a hawkish speech by Bank of Japan (BoJ) Governor Kazuo Ueda on 1 December.

BoJ policy signals take centre stage

Ueda struck an optimistic tone on key prerequisites for policy normalisation, making several critical points:

• Downside risks to the United States (US) economy, one of the BoJ’s focal concerns, have eased somewhat since earlier assessments
• Momentum is improving for next year’s shunto negotiations, driven by persistent labour shortages, aggressive demands from unions, and proactive wage policies from business groups like Keidanren
• The BoJ board will weigh the ‘pros and cons’ of a hike at the upcoming December Monetary Policy Meeting (MPM), underscoring a data-dependent but increasingly proactive stance.

This optimistic tone was amplified by subsequent reports indicating that Prime Minister Takaichi’s government would not oppose a December interest rate increase, respecting the central bank’s independence.

Markets responded swiftly: the probability of a 25 basis point (bp) hike to 0.75% now exceeds 90%, up from around 30% before Ueda’s speech. With the move all but locked in, attention has shifted to the BoJ’s forward guidance on the pace of future hikes and the eventual terminal rate, details that could either extend the Nikkei’s bull run or introduce fresh volatility.

What to watch in the BoJ’s playbook

Investors will closely monitor Ueda’s post-meeting press conference for clarity regarding the three main points below, particularly after his 1 December remarks teasing a ‘clearer indication’ of the policy rate’s distance from Japan’s neutral interest rate following any hike.

1. Unchanged neutral range: the BoJ is unlikely to narrow its longstanding estimate of the neutral rate (1% - 2.5%), given the wide variance across economic models, maintaining flexibility amid uncertainty.
2. Still accommodative post-hike: Ueda could affirm that even at 0.75%, the policy rate remains below the neutral band, ensuring monetary conditions stay supportive with ample room for additional tightening if needed.
3. Heightened caution ahead: as rates inch closer to neutral territory, the board will scrutinise their economic and inflationary impacts more rigorously, potentially signalling a measured, non-aggressive normalisation path to avoid derailing growth.

A dovish-leaning script, emphasising gradualism, could reignite risk appetite and weigh on the Japanese yen, benefiting exporters and the Nikkei. Hawkish surprises, however, might strengthen the yen, squeeze corporate margins and prompt a deeper-than-expected pullback in the Nikkei.

Nikkei cash technical analysis

The Nikkei 225 staged an impressive rally of over 70% from its ‘Liberation Day’ low at 30792 to the early November record high of 52,636. Over the past six weeks, however, the index has entered a consolidation and corrective phase, digesting those substantial gains ahead of this week’s BoJ interest rate meeting.

If the Nikkei were to see a sustained break below support at 49,200 after the BoJ meeting, it would indicate that the Nikkei is taking another leg lower (Wave C of a three-wave ‘ABC’ correction in Elliott Wave) towards 46,720, which would account for an approximate 10% pullback from its 52,636 record high.

If signs of basing are observed near the wave equality 46,720 pullback target, traders might consider long positions looking for a retest of the 52,636 record high.

Conversely, a decisive move above near-term resistance at 51,200 after the BoJ meeting would invalidate the corrective count, suggesting the uptrend is resuming immediately and paving the way for fresh highs.

Nikkei cash daily candlestcick chart

• _{Source: TradingView. The figures stated are as of 16 December 2025. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}