If it break through the technical resistance level at 16,744, Nikkei 225 has every chance to continue to regain the lost ground towards 17,900, the recent peak in February.
External pressure on Tokyo is subsiding as the US market appears to have settled down during the recent weeks. Macro economic environment in the US remains healthy and there is little chance that the recovery will stall anytime soon. The Fed is likely to wait for more evidence.
The risk remains in the direction of the currency. It is harder to justify intervening, even if it is merely verbal, if the authorities in Japan follow the spirits of G20 statements. Cheap Yen has already drawn criticisms by several US presidential candidates. Trade surplus is on the rise. It is hard to find reasons why Yen should not spike further from this level towards 110, or even 100. Yen remains 10 ~ 15% undervalued.
Macro economic environment in Japan is dull and there is no sign of a change. The government might try to support the economy through fiscal packages or by delaying consumption tax-hike. There are clear incentives ahead of autumn election. But they are unlikely to boost the economy significantly without currency depreciation. Japan cannot export its way out anymore. Earnings growth will come to a halt.
It appears corporate earnings already peaked in previous quarter. Falling profits provide little valuation support at this level. In a few months time profit forecasts for fiscal year 2017 will start to come in and potentially further depress market sentiment.
Overall this market can enjoy a sweet spot for the time being through March but beyond that risks are clearly on the downside. Target for Nikkei 13,000 before summer.