Are the Nikkei 225 and TOPIX Too Expensive? A Thorough Verification Using Monetary Base, PER, and Advance-Decline Ratio

Conclusion (Summary)
• Short-term (~1 month): Selling/Reduction/Hedging Recommended
The 25-day Advance-Decline Ratio is in a strong overheating phase at the 140-155% level. The TOPIX is significantly above its 25-day, 75-day, and 200-day moving averages, with the upward deviation from the 25-day moving average expanding. In the short term, waiting for pullbacks or engaging in selling/reduction/hedging to capture volatility is rational. 
• Medium-term (3-6 months): Neutral to Buying on Pullbacks
Valuations are at a PER of approximately 17.8x for the Nikkei and approximately 16x for the TOPIX, which is not at a historical bubble level but in the "middle" zone. If corporate earnings growth continues, an evaluation ranging from fair to slightly undervalued is possible. Adjustments toward the 25-day to 75-day moving averages are candidates for buying opportunities. 
• Long-term (12 months+): Continued Selective Long Positions
Although the monetary base is down year-on-year (quantitative environment tailwinds are weakening), as long as structural reforms, corporate governance improvements, and capital efficiency gains continue, broad long positions centered on the TOPIX remain effective. Base your strategy on buying on pullbacks.

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Understanding the Current Situation (Prices and New Highs)
• Nikkei 225: August 15 closing price 43,378.31 (+1.71%). Updated its all-time high on August 12 and is trading in record-high territory.  
• TOPIX: 3,107.68 as of the evening of August 15 (cash). Surpassed 3,000 for the first time in history on August 8 and continues to update highs.  

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1) Valuation (PER/PBR)
• Nikkei 225 PER (August 15):
• Market capitalization weighted basis: 17.84x
• Index weight basis: 22.17x
*Official data published daily. Recently trading in the 17-18x range. 
• TOPIX Fundamental Indicators (based on the latest monthly factsheet):
• PER: approx. 16.1x, PBR: approx. 1.42x, Dividend Yield: approx. 2.4%. The valuation of the broader market is in the "neutral to slightly undervalued" range. 

Evaluation:
• Due to its composition, the Nikkei's apparent PER tends to be higher than the TOPIX, driven by high-valuation stocks (semiconductors/high-PER/high-price tech stocks).
• On the other hand, the PER/PBR levels based on the TOPIX are not in an extremely overvalued zone historically. As long as earnings forecasts are maintained or revised upward, a "buy on pullbacks while waiting for profit-taking" approach is likely to function well. 

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2) Monetary Base (Funding Environment)
• July Monetary Base: 635.6 trillion yen (down 3.8% year-on-year). The total of cash in circulation and current account deposits is negative year-on-year. Quantitative tailwinds are in a plateau after peaking.

Evaluation:
• Support from "quantity" is slightly weakening. The fact that stock prices are still hitting new highs suggests that this phase is driven by earnings, expected growth, and policy (governance/returns). It is not solely driven by excess liquidity; it is an uptrend with a strong "earnings-driven" character. 

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3) Advance-Decline Ratio (Supply and Demand Overheating)
• TSE Prime 25-day Advance-Decline Ratio
August 12: 149.46% → August 13: 155.21% → August 14: 145.21% → August 15: 139.28% (Note: 120% or higher is a benchmark for overheating caution). Recently staying in the overheating zone.  

Evaluation:
• In the short term, this is a sign of excessive buying. We want to wait for a "pullback formation" (ratio cooling down to below 120%). 

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4) Trend Position (Moving Averages/Deviation)
• Nikkei 225: As of August 14, the deviation rate from the 25-day moving average was +4.62% (previous day was +6.46%). Slowing down after temporarily exceeding the overheating line (+5%). Note that the "upward deviation" in the high-price zone continues. 
• TOPIX Futures-based Key Levels (as of the end of the August 16 night session):
Against the cash closing price of 3107.68 on the 15th, the 25-day MA is 2944.8, the 75-day MA is 2829.6, and the 200-day MA is 2745.6. An uptrend significantly above all three moving averages. 

Evaluation:
• Technicals are strong, but caution is required regarding a "reaction to the deviation." While pullbacks toward the band between the 25-day and 75-day moving averages are likely to become a "straightforward buying zone," chasing prices higher directly above this level worsens the risk-reward ratio.

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Comprehensive Judgment
• Short-term (~1 month): Sell/Reduce or Hedge
Reason: Advance-Decline Ratio is overheated, moving average deviation is expanding. It is rational to focus on capturing volatility through selling into rallies, gamma selling, or futures hedging. 
• Medium-term (3-6 months): Neutral to Buying on Pullbacks
Reason: TOPIX PER of approx. 16x and PBR of approx. 1.4x are moderate. Buy incrementally as it approaches the 25-day to 75-day moving average band. 
• Long-term (12 months+): Continued Selective Long Positions (Focusing on TOPIX-related, high-ROE/enhanced-return stocks)
Reason: Quantitative tailwinds are weakening, but structural changes in earnings/returns/governance continue. For indices, the TOPIX advantage is the baseline. 

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Specific Actions (Operational Memo)
1. Conditions for Buying

• 25-day Advance-Decline Ratio drops to around 120% (sign of overheating resolution).
• TOPIX: Pullback to the 25-day moving average (approx. 2945pt benchmark), or a small bullish candle formation over 3 days to 1 week just before that. Split entry: 1/3 → 1/3 → 1/3. 

2. Conditions for Profit-Taking/Reduction

• Advance-Decline Ratio overheats again to over 140%.
• Deviation from the 25-day moving average for both Nikkei and TOPIX expands to over +5%. Suppress delta for short-term positions using futures/CFDs. 

3. Hedging Benchmarks

• If the NT ratio breaks above the 25-day/200-day moving average and Nikkei > TOPIX dominance becomes excessive, there is merit in selling Nikkei x buying TOPIX (arbitrage). 

4. Assumed Ranges by Time Horizon (Benchmarks)

• Short-term: TOPIX 3,000 ± 100 range battle.
• Medium-term: Consolidation between TOPIX 2,900-3,200 → Breakout awaits earnings upside/policy catalysts.
(Ranges are benchmarks based on technicals and current conditions. Assumes updates based on daily closing prices.)

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Supplement: Data Sources (Main Basis)
• Price: Nikkei 225 current price (August 15 close) official, TOPIX cash chart.  
• New High Facts: Media reports regarding NIKKEI/TOPIX all-time high updates. 
• PER/PBR: Nikkei 225 daily PER (official), TOPIX fundamentals (factsheet). 
• Monetary Base: Bank of Japan "Monetary Base (July, -3.8% YoY)" monthly report.
• Advance-Decline Ratio: TSE Prime 25-day Advance-Decline Ratio trend (via Kabutan/Y! Finance).  
• Moving Average Points: TOPIX futures technical levels (25/75/200-day). Nikkei 25-day MA deviation rate overheating judgment. 

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Summary (One More Time)
• Currently: "Short-term is sell/reduce/hedge" / "Medium-term is buy on pullbacks" / "Long-term is continue selective long positions".
• Triggers are "Advance-Decline Ratio below 120%" and "touching the 25-day MA to just before the 75-day MA." That is the most potent zone for re-buying.