Analysts at Bank of America (BofA) expect Japanese stocks to keep rising through the end of the year, driven by improving trade conditions and increasing corporate reforms, though short-term challenges may limit growth.
The TOPIX index has made a strong recovery since a selloff in April. However, BofA analysts warned that price-to-earnings ratios have aligned with updated forecasts, and corporate guidance remains cautious due to ongoing trade uncertainty between the U.S. and Japan.
Despite these concerns, two key factors could fuel further stock gains: falling resource prices and a gradually stronger yen, which are helping to reverse inflationary pressures caused by the war in Ukraine. Additionally, a rise in corporate restructuring is expected to boost stock performance.
BofA analysts pointed out that share buybacks are now happening at double last year’s pace, with tender offers such as NTT’s bid for NTT Data signaling increased momentum in unwinding inefficient corporate structures. This trend is being driven by pressure from regulators, activist investors, and the need for more efficient capital use due to inflation.
The analysts recommended focusing on sectors that cater to domestic demand, such as IT services, real estate, and certain retailers, as well as “quality cyclicals” with strong pricing power. They also highlighted opportunities in small-cap growth stocks and companies undergoing governance reforms.
While risks persist, including the possibility of earnings revisions, BofA believes Japan’s improving trade terms and ongoing structural reforms create a “unique catalyst” for the market’s outperformance.
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