Investing.com — Japanese stocks have largely remained range-bound since the start of 2024 after posting strong gains over the past year, but BofA analysts believe there are a number of negative factors for the domestic market. They point out that it may already be factored in.
After rising nearly 20% over the past year, the index has remained flat since the start of 2025, with BofA analysts saying the lack of trade tariffs that had been particularly feared. Taking this into account, the index noted that it responded positively to the inauguration of US President Donald Trump.
“We believe this is the first step for the market to price in the end of bad news, given the negative impact on financial conditions from the sharp rise in US long-term interest rates starting in late December 2024,” BofA analysts said in a note. ”
Still, markets remain uncertain about the near-term outlook for tariffs, given President Trump's threat to impose 10% tariffs on China and 25% tariffs on Canada and Mexico. are. But BofA expects clarity on tariffs will further increase the view that the bad news is over.
BofA says Bank of Japan rate hike is already priced in
BofA said a strong yen and concerns about the Bank of Japan's interest rate hike in January are likely holding back gains in the Japanese market.
However, BofA believes that the rate hike is priced in by the market, with futures markets suggesting a greater than 90% probability of a rate hike.
BofA noted that if the Bank of Japan decided to raise interest rates now, the market would likely adopt the view that further rate hikes are unlikely until at least after the House of Councilors election later this year.
“After the January BOJ meeting, there is a good chance that the market will conclude that the negative factors have disappeared for the time being,” BofA analysts said.
The investment bank reiterated its focus on domestically exposed Japanese stocks and niche export companies given the uncertain economic outlook.
But BofA said a “growing sense that bad news is priced in” could also make blue-chip cyclical stocks look more attractive, a trend driven by a pick-up in foreign investor inflows to Japan. He pointed out that it is likely to become even stronger.
