Japan Stock Recovery Expected to Accelerate in November – BofA

Analysts from Bank of America anticipate a recovery in Japanese stocks, following a significant downturn in August, particularly as uncertainties surrounding both U.S. and local elections begin to dissipate towards the year’s end.

The Nikkei 225 and TOPIX indexes fell into bear market territory at the beginning of August due to a hawkish stance from the Bank of Japan and a strengthened yen. Although there has been a notable rebound since then, the indexes are still trading well below their peak levels from earlier in the year.

Bank of America forecasts that the recovery will gain momentum starting in November, especially after the U.S. presidential elections, which are expected to be a closely contested race between Donald Trump and Kamala Harris.

Japanese half-year earnings are slated for release by November, which will provide further clarity on the impact of recent yen appreciation on corporate earnings. However, the brokerage does not foresee “significant earnings deterioration.”

Bank of America prefers stocks with a focus on domestic demand, as recent data suggests improvements in private consumption. The firm also recommends exposure to high-quality cyclical stocks, anticipating more accommodative monetary policy in key overseas markets for Japan.

Additionally, the ruling Liberal Democratic Party in Japan is due to conduct its leadership elections soon, which will determine the next Prime Minister. While some market volatility is expected following the elections, it is believed that the incoming candidate will likely maintain the party’s current policies in the short term, leading to minimal disruption.

The overall impact of these leadership elections is anticipated to be temporary. A change in leadership may also delay the Bank of Japan’s plans to further increase interest rates, potentially limiting the yen’s strength. While there is scope for additional rate hikes, a “reasonable pace” is expected, which should not hinder the stock market’s recovery.

Bank of America indicates that the Japanese market is already in a recovery phase, with risk sentiment projected to stabilize within two to three months following the recent crash.