#Japan’s #stock market rally has stalled over the past two months, with the benchmark Nikkei 225 index remaining largely rangebound below record highs since March.
Analysts at Bank of America (BoFA) attribute this stalling to two main factors: significant weakness in the Japanese yen and somewhat disappointing earnings guidance from companies.
The Nikkei 225 experienced a remarkable rally in the first quarter, reaching a record high of 41,087.75 points. This surge was driven by optimism over a recovery in Japanese consumption and strong corporate earnings.
However, #BoFA analysts noted that the sustained weakness in the yen has dampened this optimism, particularly as the government seems to be intervening in foreign exchange markets to support the currency.
“It appears that the yen’s depreciation may have exceeded the ‘critical point’ where it benefits Japanese equities,” #BoFA analysts wrote in a note. They mentioned that fears of currency intervention had negatively impacted both domestic and external demand-oriented sectors.
Additionally, they observed that interest rates need to be raised further to curb yen depreciation—a trend that does not bode well for stock markets.
Concerns over softer guidance from Japanese companies, especially as last year’s price hikes eroded demand, have also negatively impacted sentiment towards Japanese markets.
Recent GDP data showed Japan’s economy contracted more than expected in the first quarter, amid sustained pressure from declining consumer spending.
#Market tone may still improve, long-term outlook brighter
Despite these challenges, BoFA analysts believe sentiment towards Japanese stocks could improve in 2024, provided companies manage to achieve earnings growth despite a conservative outlook.
They expect market conditions to improve in the July-September and October-December periods, suggesting that the May-June period could present a buying opportunity.
BoFA analysts also noted that improving Japanese economic conditions—particularly higher wages and persistent capital spending by businesses—could enhance the outlook for stocks.
They anticipate that larger investment houses will remain invested in Japanese equities through 2025.
BoFA analysts continue to recommend a mix of blue-chip stocks and value stocks for exposure to Japanese equities at this time.
An improvement in local economic conditions could also attract investments into sectors exposed to domestic demand, as well as the manufacturing sector.
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