Investing.com-- Japanese equities may find stability as pressures from rising U.S. long-term rates and Bank of Japan (BoJ) rate hike concerns ease, while domestic growth catalysts provide support in the medium-term, Bank of America (NYSE:BAC) (BofA) analysts said in a note.
BofA analysts highlight that the surge in U.S. long-term rates, driven by an increased term premium, appears to have stabilized, reducing market downside risks.
Additionally, BoJ Governor Kazuo Ueda’s recent comments were described as “neutral,” offering no firm commitment to an imminent rate hike. The analysts see a rate hike before the Upper House elections as a “tail risk,” aligning with market expectations.
Despite these positive shifts, BofA remains cautious about lingering risks, particularly U.S. tariff concerns and intensifying global AI competition.
The global AI race presents “binary risks,” with uncertain implications for Japan’s high-end semiconductor sector, analysts said.
“We believe the lingering tariff concerns could keep market volatility elevated at least in the near term,” analysts wrote, though they believe diplomatic compromises could prevent worst-case scenarios.
"Yet, as long as President Trump prioritizes using tariffs as a negotiation tool with other countries we believe the worst-case scenario can be avoided through compromises by counterparties, including Japan," they added.
Domestically, BofA points to three key drivers supporting equities over the medium term -- robust third-quarter earnings, strong wage growth expectations from spring labor negotiations, and corporate reforms focused on boosting shareholder returns. These factors could create buying opportunities, analysts stated.
On sector positioning, BofA favors “quality cyclicals,” which tend to perform well when financial conditions ease.
Analysts also highlight signs of a bottoming in U.S. manufacturing, which could support Japanese industrials with overseas exposure. Additionally, a shift in investor sentiment has led to renewed interest in cyclicals, signaling potential rotation in stock selection.