Japanese Stocks Outlook for 2025

BofA analysts predict a positive outlook for Japanese stocks in 2025, with domestic economic improvements likely balancing U.S. trade tariff headwinds.

Expectations

• Nikkei 225: Expected to finish at 43,500 points.
• TOPIX: Forecasted to reach 3,050 points, indicating a 10% upside from current levels.

BofA's estimates are more optimistic than those from UBS, which forecasts only a 5% upside.

Economic Context

2025 may mark the first year in 30 where inflation becomes entrenched in Japan, driven by:
– Persistently higher wages.
– Economic stimulus measures.
– Tax reforms.

Japanese stocks may remain stable in the first half of 2025, as strong domestic factors counteract foreign challenges, but are expected to gain momentum in the second half.

Factors Influencing Stock Growth

BofA anticipates Japanese stocks will respond favorably to:
– U.S. tax cuts.
– Positive policies from the Chinese government.
– Recovery in the manufacturing sector.
– Rising Return on Equity (ROE).

Analysts expect rapid U.S. policy implementation compared to the previous administration.

Earnings and Sector Recommendations

BofA projects strong EPS growth for Japanese firms, along with GDP growth and rising inflation. They recommend prioritizing sectors with stable earnings and domestic focus, including:
– Financials
– Construction
– Services
– IT
– Gaming
– Broadcasting

A "full-scale" rally in cyclical and China-related sectors is expected in the latter half of 2025.

U.S. Trade Impact

BofA notes that U.S. trade tariffs may be implemented early in 2025, potentially affecting stock valuations negatively. However, improvements in Japan's domestic economy are expected to mitigate these effects. The Japanese economy is seen as less vulnerable to China than during the previous U.S. administration, limiting the trade tariff fallout.

U.S. tax cuts will need Congressional approval, but they are expected to uplift market sentiment later in 2025.