Analysts' Outlook on Japanese Equities

Analysts at Bank of America (BofA) expect limited downside for Japanese equities despite global uncertainties following recent policy updates by the Federal Reserve and the Bank of Japan (BoJ).

Recent Policy Updates

On December 18, the Federal Open Market Committee (FOMC) adopted a hawkish stance, reducing 2025 rate cut expectations from four to two. Meanwhile, BoJ Governor Kazuo Ueda hinted at a potential rate hike but did not signal any urgency. These developments have tempered market expectations, weakened the yen, and influenced trading sentiment.

Impact on Japanese Equities

BofA analysts note that Japanese equities could face some pressure from fluctuations in the U.S. stock market. On December 18, U.S. indexes, especially tech-driven ones, experienced declines due to concerns over rising interest rates. Despite this, BofA remains optimistic about the stability of Japan's market.

Current valuations are seen as suggesting limited downside potential, while the earnings revision index has turned slightly positive. Historically, significant downturns in Japan occur when this index trends negative, as was evident in 2018.

Sector Focus

BofA's outlook favors sectors driven by domestic demand, which are supported by ongoing wage growth. The export sector could gain from a weaker yen, though BofA advises caution and emphasis on high-quality stocks. Stocks that are insulated from U.S. tariffs and China's economic slowdown are particularly attractive.

Cyclicals such as factory automation, electronic components, and automotive industries are under observation for potential rebounds, but not before the April-June 2025 quarter. Additionally, stocks that offer dividends are expected to attract investor interest, especially between December and March.

A weaker yen offers additional support but may not lead to significant gains due to risks associated with currency intervention and the overarching strength of the dollar, as per BofA.

While external volatility may impact sentiment, BofA believes that Japanese equities remain well-positioned due to attractive valuations, selective sector opportunities, and measured economic resilience.