Investing.com– Analysts at Bank of America (BofA) expect a modest decline in Japanese stocks despite global uncertainty following recent policy updates by the Federal Reserve and the Bank of Japan (BoJ).
The Federal Open Market Committee (FOMC) struck a hawkish tone on December 18, raising the 2025 rate cut expectations to two from four previously estimated. In Japan, BoJ Governor Kazuo Ueda hinted at the possibility of a rate hike but refrained from indicating urgency. This dampened market expectations, weakened the yen, and influenced trade sentiment.
BofA analysts said that Japanese equities may feel some pressure from the American stock market.
US indices, particularly those driven by technology stocks, fell on December 18 due to concerns about rising interest rates. Despite this, BofA analysts remain optimistic about the stability of the Japanese market.
Current valuations suggest a marginal contraction, while the index for earnings revisions has turned positive. Historically, sharp market declines in Japan occur when this indicator does not go well, as seen in 2018, according to BofA.
BofA's outlook favors domestic demand sectors, supported by continued earnings growth. Export sectors could benefit from a weaker yen, but BofA advises caution, focusing on high-quality names.
Stocks shielded from US tariffs and China's economic slowdown are seen as more attractive, analysts say.
Cycles such as factory automation, electronics, and automotive industries are expected to rebound, except for the April-June 2025 quarter. In addition, dividend-yield oriented stocks are ready to receive the attention of investors, especially in the period from December to March, analysts said.
A weaker yen provides additional support but is unlikely to drive major gains due to potential risks of currency intervention and overall dollar strength, according to BofA.
While external volatility can weigh on sentiment, BofA believes Japanese equities remain well-positioned due to attractive valuations, select sector opportunities, and a measure of economic strength.