Well-wishes to everyone in Japan today and I hope you had a great Labor Day yesterday, and Labor Day observation today (which is why markets are closed).

However, futures are still open, and things on these markets look rather good! German IFO surveys came in way over expectations, and this has sent the markets on a general upwards move. IFO Sentiment: 104.7 vs expectations of 103 from a prior reading of 103.2, IFO Expectations 99.7 vs expectations of 98.6 from a prior of 98.3. Adding to this, Japanese futures have been trading well overall following the Friday close, given PBOC interest rate reductions that has given the global equity markets a very good feeling over the weekend.

Let’s look into some more specifics on the Japanese market, and how things might look tomorrow when we get an open. First, a refresher on the futures formula, which will come in handy later.

I’ll look into the little data I have on Japan indices and try to provide some sort of forecast as to where the futures prices for the JPX Nikkei Index 400 might end up, but bear with me, this won’t be particularly good given my lack of access to current futures prices and overall TOPIX dividend yields. For now, let’s look at the technical analysis for the Nikkei 225 and the USD/JPY rates to begin with and see what the *overall* market might be doing tomorrow.

## Nikkei 225:

Being above the November 3rd peak is obviously a very good thing, and there is a very soft resistance region to overpower before the overall peak price is reached. The resistance if breaking into a new high would probably be 17 700 or slightly below, thanks to the aggressive positive trend line meeting the upper channel trend line on the chart which will act as resistance.

The moving average indicators here are a little bit less solid than on the currency chart below, but that mostly comes from differences in the overall volatility. We also have a positive DMI but with little-to-no trend, and positive MACD signals. The best indication is probably that both of these, and the EMAs, are providing support to the price, and since Wednesday the last week, the Nikkei has been on volatility-adjusted outperformance on the USD/JPY rate, which would be very positive if it is maintained in the week ahead, thanks to the chart below.

## USD/JPY:

First of all, there is a pretty good MACD EMA divergence bottom indication on the 4-hour chart, similarly we also have the DMI divergence increasing (off a near-kiss!). The MACD here is really powerful, since the signal is in the positive, and so was the bottom it made. These setups can often ignite significant momentum increases.

On top of this, the 48 and 120 hour exponential moving averages are providing a lot of support on this price! Given the fact that we are back in trend now after a brief rally outside of it following the Japanese election being called for December 14th, the prospects for an increase for the USD/JPY pair look very, very good as both the MAs shown will act in support as well as the lower trend line, even though the price right now is challenging the upper trend line.

## Back to the futures:

What type of data do I have available then? For the futures specifically, I have the current value for the Nikkei 225 futures, at a 7.5 point premium for December 2014 futures, and a 17.5 point *discount* for March 2015 futures. Since the 2-year yield on JGBs is literally zero, it probably helps to use something else to estimate the risk free rate. Thankfully, the premium for next month on the Nikkei helps us isolate that, as the expectation is that there will be no dividend paid in the coming five weeks. (The approximation to five weeks is one trading day off, I can live with that since this is back-of-the-enveloping anyway).

Thus, F(Dec) = Spot * exp[ (1/12) * r ], r = 0.446% if spot is 17515 and the December futures are 17 522.5. Rolling this onwards as the real risk-free interest rate and assuming 13 weeks in the year-to-April period, would imply a dividend-less price of March futures of 17 542, June futures of 17 562, September futures of 17 581, and December 2015 futures priced at 17 601 for the Nikkei. I can only see the actual price of the March 2015 futures, so on that prospect at least it looks like the expected annualized dividend yield (in current yen) is 1.180% on the Nikkei 225, or 0.734% above the implied risk-free rate! This is a relatively good benchmark to use for the JPX Nikkei Index 400 going forwards.

[Note: these numbers were taken off a CFD provider, CMC Markets, and thus might not be extremely accurate. These values also fluctuate a lot between different periods throughout the day. I took the spread data during the 5pm JST open, to have little interference from other markets and now the March spread is nearly zero. Still implies a roughly 0.6% dividend yield on an annualized basis, but it exemplifies how volatile these estimations are.]

If we use the current Nikkei futures to imply the opening spot of the JPX Nikkei Index 400 tomorrow, then we get an estimated opening price of 12 898.38, meaning the minimum contract size would have a par of 1 289 838 yen. We get dividend-less futures values of 12 903.53, 12 917.94, 12 932.35, 12 946,79 and 12 961.24 using the same implied risk free rate matched to the same months as for the Nikkei 225 above. I would expect an annualized dividend yield probably higher than 0.85% above the risk free rate, meaning March to December futures prices are expected to be close to 12 879, 12 866, 12 852 and 12 839 tomorrow, assuming a constant dividend yield throughout every quarter (haha, yeah, pigs can fly too). It will be interesting to see the Tokyo open tomorrow anyway!