Micro Nikkei (JPY) Futures Trade Ideas — CME:MNI1!

Capital Rotation: A Value Play Amidst Tariff Headwinds Nikkei 225 – Capital Rotation: A Value Play Amidst Tariff Headwinds By Pranay Yadav, Portfolio Analyst, Mint Finance The US Liberation Day announcement on April 2 sent Nikkei 225 plunging. Subsequent tariff pause led to a strong rebound. Since then, Nikkei has recouped the losses. Significant risks remain, making renewed weakness possible if tariffs are reinstated after the pause. Major Japanese stocks are heavily reliant on exports to the US. Any disruption significantly hurts their revenues. While examining the tariff impact through the shift in Bank of Japan (BOJ)’s monetary policy, the paper also unpacks recent trend of capital rotation into Japan market. Chart 1: Nikkei 225 price action on tariff and its pause Tariffs & Shifting BOJ Outlook Trade tensions have cast a long shadow over Japan’s economic outlook. At its May 1 meeting, the BOJ held its short-term interest rate at 0.5%, while sharply cutting upcoming growth forecasts. Market expectations of BoJ rate trajectory have shifted. In a recent Reuters poll, expectation of a rate hike in Q3 2025 declined from nearly two-thirds to just over 50%. Meanwhile, 84% of respondents do not anticipate any rate hikes at BoJ’s June meeting. Chart 2: The outlook of BoJ rate hikes has been pushed further out, but the terminal rate by the end of 2025 remains unchanged. The BOJ halved the projected GDP growth for fiscal 2025/26 (to 0.5%) and pushed back the timeline for hitting its 2% inflation target by a full year to 2026. Governor Kazuo Ueda warned that “recent developments surrounding tariffs will weigh on Japan’s economy by slowing global growth, hurting corporate profits, and prodding households and companies to hold off on spending”. Policymakers struck a cautious tone, noting “extremely” high uncertainty around the outlook and indicating they will gauge data carefully before adjusting rates. Downside Risks from Export Weakness Nikkei has heavy weighting toward major exporters. U.S. tariffs pose a significant risk to their revenues. Beyond the direct revenue impact, exporters feel the heat of a strong yen. A weaker yen boosts profits when foreign earnings are converted, but as the yen strengthens, the profits tend to shrink due to currency effects. According to Toyota, one yen change in the USD/JPY currency pair impacts its operating profit by 50 billion yen. Chart 3: Yen has appreciated 8.8% against the dollar YTD but remains 25% weaker from its 2022 level. Chart 4: Historically, the Nikkei 225 has shown weaker performance when export volume losses coincided with yen-driven margin compression. In particular, the tariffs risk impacting the Nikkei 225’s heavy technology exposure. Chart 5: The Nikkei 225 is dominated (47% weightage) by the tech sector In an earnings update, Tokyo Electron Management (which has a 5.6% weight) indicated a flat business environment for the year, citing a “lull in both automotive and power semiconductor investment, and investment by emerging Chinese manufacturers.” Strong growth is only expected in 2026. The retail industry – a major index component (14%) – is dominated by Fast Retailing, which holds the single largest individual weight in the index at 11%. Fast Retailing the holding company of Uniqlo chains, has already trimmed second-half profit guidance by roughly 2%-3% after accounting for potential duties, despite sourcing most U.S. inventory from lower-tariff Southeast-Asian plants. Capital Rotation to Japan Through the lens of P/E Convergence Despite these challenges, global investors are increasingly rotating capital into international equities amid intensifying trade tensions. EU defence stocks have surged. Chinese equities have risen. Japanese stocks stand to benefit too. Foreign funds were net buyers of Japanese stocks for three weeks in a row in April. Chart 6: Net weekly foreign investment in Japan stocks has started to ramp up Japan offers a compelling relative value story. The Nikkei 225 trades at a P/E ratio of 18.3, roughly 34% cheaper than the S&P 500 (27.9 P/E). This valuation gap stands at near multi-decade highs, suggesting room for P/E multiple convergence as Japan’s capital market attracts more inflows. Chart 7: Nikkei 225’s P/E Ratio is substantially lower than S&P 500, suggesting the potential for P/E convergence Conclusion The tariff impact on Japanese equities is multi-faceted. Delay in BoJ rate hikes offers near-term support for the equity market, potential long-term effects on growth & inflation could offset these gains. Moreover, given Japan’s export-dependent economy, tariffs pose a significant revenue risk—particularly for firms with a high index weighting in the Nikkei 225. Many of these companies are already issuing more conservative outlooks for the year ahead. Chart 8: Technical signals point to a bullish sentiment on Nikkei 225 although resistance is on the horizon Investors expecting a favourable trade deal may opt for a long position on the Nikkei 225. A hypothetical trade setup is outlined below. In this case, the yen-denominated Micro Nikkei Futures contract could further enhance the profit in USD due to the anticipated strengthening of the yen. Chart 9: Hypothetical long position on CME Micro Nikkei 225 (Yen) futures expiring in June Entry: 36,700 If Nikkei 225 rises: 38,500 Stop Loss: 35,200 Potential Gains (JPY): JPY 90,000 ((38,500 – 36,700) x 50 yen/contract) Potential Losses (JPY): JPY 75,000 ((35,200 – 36,700) x 50 yen/contract) Reward-to-Risk: 1.2x Conversely, investors anticipating the continuation of tariffs may consider taking a short position on the Nikkei 225. Chart 10: Hypothetical short position on CME Micro Nikkei 225 (Yen) futures expiring in June Entry: 36,700 If Nikkei 225 falls: 34,500 Stop Loss: 38,200 Potential Gains (JPY): JPY 110,000 ((36,700 – 34,500) x 50 yen/contract) Potential Losses (JPY): JPY 75,000 ((36,700 – 38,200) x 50 yen/contract) Reward-to-Risk: 1.47x For investors seeking to avoid directional exposure amid trade uncertainty, a spread trade may be suitable – going long CME Micro Nikkei 225 futures (USD-denominated) and short CME Micro E-mini S&P 500 futures. Why choose a spread trade? It helps reduce outright risk amid near-term uncertainty. With trade disruptions still unresolved, the outlook remains unclear. A spread trade taps into the relative outperformance through P/E convergence, limiting downside while capturing divergences in equity performance. Spread trades help hedge global market shocks—such as the one in early April—while still offering meaningful upside potential. Chart 11: Nikkei 225/S&P 500 spread protects against a sharp decline during risk events Largest Decline (Past Year): Nikkei 225 (Yen) Futures -6.0% E-Mini S&P 500 Futures -6.1% Spread -4.5% Largest Increase (Past Year): Nikkei 225 (Yen) Futures 7.8% E-Mini S&P 500 Futures 9.0% Spread 3.0% A position consisting of 3 x MNKM2025 ($55,170 in notional) and 2 x MESM2025 ($56,650 in notional) roughly balances notional on both legs, allowing for a purely relative outperformance-based trade. In this trade setup, the Micro Nikkei 225 (USD) contract is used to keep the P&L on both legs in the same currency for simpler spread execution. Chart 12: Hypothetical spread position between CME Micro Nikkei 225 (USD) and CME Micro E-mini S&P 500 expiring in June Scenario 1: Sell 2 MESM2025 , Buy 3 MNKM2025, MESM2025: 5,665 -> 5,409 MNKM2025: 36,780 (Unchanged) Ratio: 6.8 Hypothetical Profit/Loss: USD 2,560 (5665-5409) x 5 x 2 Scenario 2: Sell 2 MESM2025 , Buy 3 MNKM2025, MESM2025: 5,665 (Unchanged) MNKM2025: 36,780 -> 38,522 Ratio: 6.8 Hypothetical Profit/Loss: USD 2,613 (38522-36780) x 0.5 x 3 Scenario 3: Sell 2 MESM2025 , Buy 3 MNKM2025, MESM2025: 5,665 -> 5,885 MNKM2025: 36,780 (Unchanged) Ratio: 6.25 Hypothetical Profit/Loss: USD -2,200 (5665-5885) x 5 x 2 Scenario 4: Sell 2 MESM2025 , Buy 3 MNKM2025, MESM2025: 55,665 (Unchanged) MNKM2025: 36,780 -> 35,406 Ratio: 6.25 Hypothetical Profit/Loss: USD -2,061 (35406-36780) x 0.5 x 3 Trade Nikkei 225 Futures from 10 Cents/Lot* Trade Nikkei 225 Futures from just 10 cents/lot. Learn more here and access this low-cost opportunity to start trading CME Micro Nikkei 225 with ease. The author’s views are independent and do not represent that of Phillip Nova. For applicable terms and conditions and a full risk disclaimer, please refer to www.phillipnova.com.sg. This advertisement has not been reviewed by the Monetary Authority of Singapore.

Bullish Nikkei Faces Formidable Headwinds Japan’s lost decades are behind us. Many long-term factors are driving resurgence in Japanese equities. Economic growth is accelerating – driven by strong domestic consumption. Radical market reforms have made Japan attractive for domestic and global investors. As a result, the benchmark Nikkei 225 set a new all-time-high after four decades. However, the rally is facing challenges. Tightening monetary policy, trade uncertainties, and waning impact of corporate efficiency reforms pose near-term headwinds that could push the benchmark into a correction, followed by a period of consolidation. BOJ’s rates hikes The Bank of Japan (BoJ) plays a crucial role in the performance of Japanese equities. Since 2016, the BoJ instituted negative rates to support economic growth which boosted equity markets. Chart 1: From 2015 to 2025, loose monetary policy boosted the Nikkei 225, but equities have stagnated since rates began rising However, in March 2024, the BoJ hiked rates for the first time after two decades. Subsequently, rates were lifted twice, up to 0.5%, the highest since 2008. Crucially, it intends to raise rates further as part of a broader return to neutral policy rate – one that’s neither too restrictive nor too accommodative. Chart 2: The Nikkei 225 tends to rise slightly before BoJ meetings but falls sharply afterward, especially following rate hike (2024 to Present) The BoJ is expected to hike rates by 50 basis points by end of March 2026 according to a Reuters poll . Two-thirds expect the next rate hike in Q3, likely in July this year. Traditionally the wage hikes in spring serve as a critical indicator for the BOJ, influencing its decision to continue raising interest rates as part of its shift towards a more neutral monetary policy. This year, many economists expect the wage hikes to match or exceed 5.1% as seen in 2024. With yen’s slide halting, the BoJ will have more room to manoeuvre. Consequently, a rate hike seems likely forming additional headwinds to Japanese equities. Fading impact of Corporate Reforms Nikkei’s ascent is also thanks in part to TSE’s corporate reforms. For years, Japanese equities were seen as “value trap,” dissuading investors. In 2023, to unlock the value trap, the TSE embarked on a campaign to enhance capital efficiency among listed Japanese firms to attract wider investment. New listing rules “urge” firms to deploy their capital better – either through shareholder returns or CAPEX. These reforms were effective in the near-term, boosting key valuation metrics such as P/B and P/E ratios. However, the improvements from these reforms are starting to slow. Chart 3: Japan’s Prime Market weighted average Price-to-Book ratio has fallen back to pre-reform levels over the past year (2023 to Present) Average P/B and P/E ratios of the prime market firms listed on the TSE is back to pre-reform levels. The large short-term bump from these policies have faded, no longer providing an immediate tailwind. Chart 4: Japan’s Prime Market weighted average Price-to-Earnings ratio has fallen back to pre-reform levels over the past year (2023 to Present) Tariff Risks Haunt Markets Perhaps the largest near-term risk facing the Nikkei 225 is the potential for trade disruptions. Chart 5: Nikkei 225 daily returns show a sharp drop on the day tariffs were announced Trump has announced a steep 25% tariff on imported cars, set to take effect on April 2, a dramatic 10-fold increase from the current 2.5%. Additionally, he has raised the steel and aluminium tariffs to 25%, with no exemptions or exceptions—a significant blow to Japan, one of America's key trade and security allies. Despite Japan’s trade minister Yoji Muto lobbying for relief in Washington, the U.S. has yet to offer any concessions. US remains Japan’s largest export market, accounting for ¥21 trillion ($140. 6 billion) in trade, with automobiles making up nearly 28% of that figure. The impending tariff spike is expected to dent Japanese exports, slash domestic production, and squeeze profit margins. Trade tariffs, especially those impacting some of the largest companies in the Nikkei 225 present a significant risk for investors. Additionally, the tariffs are likely to lead to a shrinking trade surplus for Japan which may weaken the yen and further exacerbate inflationary pressures, prompting the BoJ to hike rates. Nikkei 225 is Weighted Towards Exporters The Nikkei 225 index is dominated by technology firms which makes up almost half of the index. This sector includes both Electronic Manufacturing firms and Software & Communications companies. Notable firms within this sector are Tokyo Electron (5.9%), Advantest (5.7%), Softbank Group (4.2%), and KDDI (2.5%). Chart 6: Nikkei 225 sector weightings shows large weightage towards technology firms Other notable categories are Consumer Goods and Materials. Consumer Goods is dominated by Fast Retailing, the single largest component of the index with a weight of 10.7%. The index is impacted substantially by trade given its heavy tilt towards manufacturing. Rising input costs from imports and reduced demand for exports can both stifle performance Chart 7: Nikkei 225 Sector wise 1Y performance. Over the past year, Finance has been one of the strongest sectors in the index. Contrastingly, Producer Manufacturing, which has a high weightage in the index, has been among the underperforming sectors. This trend is likely to continue, with trade disruptions and a slowing AI rally posing headwinds to major index components. CME Group Nikkei 225 Futures CME Group’s suite of Nikkei 225 futures provide a range of instruments to express views on Japan’s benchmark equity index. Futures are available in two different contract sizes – Standard and Micro. More information on these can be found at the Nikkei 225 Futures page . Particularly, the newly launched Micro Nikkei 225 contract presents interesting possibilities for both trading & hedging exposure. Due to the smaller size, the contract requires lower margin, boosting capital efficiency for traders. For risk managers, it allows for precise hedging, reducing unwanted residual exposures. A crucial use case of these futures is the expanded trading hours in the week. Investors can trade CME Group’s Nikkei futures 23 hours a day, 5 days a week, significantly longer than the underlying cash market. This allows futures to be an effective overnight hedging tool. Chart 8: CME Micro Nikkei futures cumulative volume growth The Micro Nikkei futures are available both as a yen-denominated, and USD-denominated product. Both provide for compelling use-cases to hedge FX volatility. Investors can use the USD-denominated contract to negate any risk from movements in the yen, and trade directly using USD. Conversely, the yen-denominated contract can be deployed strategically to benefit from a strengthening yen. Technicals Signal Near-Term Bearishness Technical summary of Nikkei 225 index shows a bearish outlook on the 1D chart timeframe. This suggests potential downside in the near-term. Chart 9: Nikkei 225 technical indicator signals short-term bearish outlook In the longer-term (1-month timeframe) Nikkei 225 technical indicators show a bullish signal. Chart 10: Nikkei 225 long-term technical indicator signals bullish outlook Looking at specific technical indicators, the rebound following the tariff related decline seems to be fading with MACD and RSI, signalling a weakening trend. With Nikkei 225 trading below a key support/resistance level, strong momentum may be required to pass this level. At present, that momentum is lacking. Chart 11: Nikkei 225 RSI, Bollinger Bands, and MACD signal emerging bearish trend Hypothetical Trade Setup While Nikkei 225 has multiple long-term drivers that support secular growth, near-term risks are palpable. Tariff uncertainty, BoJ policy, and fading impact of the TSE market reforms support a short-term bearish view on the Nikkei 225. Investors can express this view by deploying a short position on Micro Nikkei (JPY) denominated futures expiring on June 13 (MNIM25). The following hypothetical trade setup provides a reward to risk ratio of 1.8x. The same view can be expressed using CME Group’s standard Nikkei (JPY) denominated contract which would scale the below P&L by 10x. Crucially, this position’s P&L is denominated in yen. The yen appreciation due to BoJ policy will further boost the USD value of this P&L, enhancing overall returns. Chart 12: Shorting Micro Nikkei (JPY) futures expiring in June (hypothetical trade setup) Entry: 37,650 Target: 36,300 Stop Loss: 38,400 Profit REACHED at Target: JPY 67,500 = ((37,650-36,300) x JPY 50), which is around ~USD 450 Loss at Stop: JPY 37,500= ((37,650-38,400) x JPY 50), which is around ~USD 250 Reward to Risk: 1.8x Trade Nikkei 225 Futures with Phillip Nova from 10 Cents/Lot* Start trading Nikkei 225 Futures with Phillip Nova from just 10 cents/lot*. Since its inception in 1983, Phillip Nova (formerly Phillip Futures) has become one of the region's top brokerages, offering access to Futures, Stocks, CFDs, Forex. ETFs and Commodities. With clearing memberships in 21 global exchanges, including CME, HKEX, SGX, and more, Phillip Nova offers you a seamless trading experience. Trade CME Micro Nikkei 225 with a lower barrier to entry.

Unlock Value in Japanese Equities Using Micro Nikkei Futures If you cannot beat them, join them. Activist funds are astute investors. Considering their investment strategies to position one’s portfolio can often lead to credible positive returns. But mind the risk as with any other investing strategies. Activist funds are circling around specific Japanese stocks that have significant potential to unlock value from undervalued real estate. Simply put, some listed Japanese firms have real estate whose book value is lower relative to its current market price. Activist investors are building stakes in these companies to nudge the management of these firms to unlock value. In theory, this must result in substantial gain in share price. The gap between book value and market value of real estate is massive. By some estimates, the gap is as large as 22 trillion JPY (~USD 146 billion) reports Bloomberg. THE BIG PICTURE LOOKS BRIGHT AND POSITIVE. Japanese equities have been making headlines for much of this year. Recovering from three lost decades, the Nikkei 225 index is trading at near 35-year highs. Mint Finance covered opportunities in Japanese equities early this year. We also articulated the nuanced behaviour of Nikkei 225 to the strength of the Japanese Yen. The Nikkei and the Yen are inversely correlated. Japanese equities remain bullish, but headwinds are lurking on the horizon. More on risk as we read on. THE SUMMARY DEEP DIVE. Let’s shift our lens from macro into the micro. Activist hedge funds have turned their sights on Japanese firms. Key among these have been Elliott Management Corp., Strategic Capital Inc., 3D Investment Partners, Palliser Capital, and Murakami Fund (co-founded by Yoshiaki Murakami ). Sectors with large unrealised real estate gains in Japan include land transportation (37%), construction (10%), telecoms (7%), retail (7%), utilities (6%), and warehousing (5%), as per Goldman Sachs estimate . The rest is held across various sectors. Top five firms with large unrealised property gains (excluding real estate & transport firms) as per Goldman Sachs ( reported by Bloomberg) are: SPOTTING THE TARGETS. This paper illustrates the mechanism of securing a risk hedged exposure to these stocks while minimising beta risk. Beta risk is the volatility that stems from broader equity market movements. It is the risk that the stock might lose in value because of a fall in the broader market. TradingView provides rich data including a forecast of stock prices and a summary of analyst ratings. For four of the five stocks shortlisted above, the 12-month price target and analyst ratings are summarised below. Based on analyst ratings, this paper suggests that we drop Aeon (8267) as it has a sell rating from the illustrative hypothetical portfolio while including the other four stocks. MIND THE RISK. Pursuit of returns is noble. But mind the risk. Recent elections in Japan resulted in the erstwhile ruling political party – the LDP – losing the majority seats in the lower house after 15 years. Political instability can create idiosyncratic risks impacting equity markets. Compounding political risk is the change in monetary policy stance. A hawkish Bank of Japan (BoJ) can send the Yen soaring which can adversely impact stocks. Recent BoJ’s rate hike (in July) by 25 basis points strengthened the yen by 12.4% from 10th July to 5th Aug. It unravelled the carry trade leading to a crushing 24.7% drop in the Nikkei 225 - the worst since Black Monday in 1987. The Nikkei volatility index surged from 17.8 in early July to 70.7 by early August. Shrewd investors recognise the importance of prudent risk management. In investing, setbacks are common. Withstanding and navigating risks by honing a resilient portfolio is essential to being successful over the long term. Risk avoidance is return avoidance using the wise words of Howard Marks of Oaktree Capital. Sustainable long-term returns can be generated by bearing risk intelligently. HYPOTHETICAL TRADE SETUP To that end, generating positive investment gains from Japanese firms that are holding onto undervalued real estate requires stripping away beta risk. Constructing a portfolio of stocks with beta risk eliminated requires deployment of financial instruments such as futures. Why eliminate beta risk? Stocks can and do get impacted by the broader market moves despite the significant upside potential that it might present as evident from the chart below. Portfolio beta hedging requires computing the beta of the portfolio and then establishing a corresponding hedging using an appropriate derivatives instrument to neutralise the beta effect. The residual portfolio returns post beta-hedging corresponds to pure alpha. To illustrate portfolio beta hedging, we assume that a certain fund manager plans to allocate JPY 800,000 per stock for each of the four stocks. TradingView publishes beta for each of the stocks. Beta adjusted portfolio value is as computed below. The beta published by TradingView is relative to the Topix index. The chart below shows that the CME JPY denominated Nikkei futures are tightly correlated to the Topix index. A 60-day rolling correlation hovers at near +1 most of the times with occasional break (in Jun & Jul this year) and currently stands at +0.88. The CME Group recently launched Micro Nikkei 225 Futures which has witnessed strong participation with both volumes and open interest rising sharply. This newly launched Micro Nikkei Futures achieved a cumulative volume of 150,000 contracts in one month since the launch on 28th Oct 2024. Bid/Ask spread is very tight, 1-2 ticks for Micro Nikkei (JPY) and 2-3 ticks for Micro Nikkei (USD). To beta hedge the above stock portfolio of four Japanese stocks, the fund manager will need to short one lot of CME Micro Nikkei (JPY) Futures expiring (later this month) which translates into a notional value of JPY 1,914,750 (based on the closing price as of 29th Nov 2024 of 38,295). Take note that the contract multiplier for the Micro Nikkei (JPY) contract is JPY 50 and hence the notional value of JPY 1,914,750 (38,295 x JPY 50). Before expiry, the fund manager will need to roll this short position into the next expiry which is in March 2025. The roll will involve buying back the Dec contract month while simultaneously selling the March 2025 contract. The outcome of this hypothetical portfolio can be visualised in the following possible scenarios as illustrated below. The illustration does not consider transaction costs & the cost of capital associated with (a) margins for the short futures position and (b) the capital for holding stocks. Also, take note that the six scenarios above are not exhaustive. Alpha from this trade setup is realised when stocks outperform the index. This is illustrated in scenarios 1 and 2 above. In Scenario 1, both stocks and index rise but stocks rise more than the index. The pay-off is a positive returns outcome. In Scenario 2, it is assumed that the correlation between the index and stocks break. The scenario imagines that stocks fall by 5% while the index plunges by 10%. The beta hedge negates the loss from stocks and delivers positive portfolio returns. Scenario 3 & 4 shows the outcome where the alpha fails to be realised. The stocks underperform the index, and this results in a loss in both the scenarios. Scenarios 5 & 6 illustrate a case where the stocks move in tandem with the index as per their trailing twelve months beta values. In theory, a perfect beta hedge will result in zero P&L. As the notional size of the futures and stock portfolio are not exactly equal to begin with, these outcomes result in a small positive P&L. MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme . DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.

Micro Nikkei (JPY) Futures

MNI1! trade ideas