Investing.com-- Analysts at Bank of America (NYSE:BAC) (BofA) expect limited downside for Japanese equities despite global uncertainties 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, scaling back 2025 rate cut expectations to two from the previously projected four. In Japan, BoJ Governor Kazuo Ueda hinted at the possibility of a rate hike but refrained from signaling urgency. This tempered market expectations, weakened the yen, and influenced trading sentiment.
BofA analysts said that Japanese equities could feel some pressure from U.S. stock market fluctuations.
U.S. indexes, particularly those driven by tech stocks, saw declines on December 18 due to worries over rising interest rates. Despite this, analysts at BofA remain optimistic about Japan's market stability.
Current valuations suggest limited downside, while the earnings revision index has turned slightly positive. Historically, sharp market downturns in Japan occur when this index trends negative, as seen in 2018, according to BofA.
BofA's outlook favors domestic demand sectors, supported by ongoing wage growth. Export sectors could benefit from a weaker yen, but BofA advises caution, focusing on high-quality names.
Stocks insulated from U.S. tariffs and China's economic slowdown are seen as particularly attractive, analysts said.
Cyclicals like factory automation, electronic components, and automotive industries are on watch for potential rebounds, albeit not before the April-June 2025 quarter. Additionally, dividend-yield-oriented stocks are poised to gain investor attention, particularly in the December to March period, analysts said.
A weaker yen provides additional support but is unlikely to drive substantial gains due to potential risks of currency intervention and broader dollar strength, according to BofA.
While external volatility could weigh on sentiment, BofA believes Japanese equities remain well-positioned due to attractive valuations, select sector opportunities, and measured economic resilience.