Japanese stocks have traded flat in early 2025 after a strong 20% gain in the previous year, with BofA analysts suggesting that negative factors, including fears of a Bank of Japan (BOJ) rate hike and U.S. trade policies, may already be priced in. The Nikkei 225 showed resilience following U.S. President Donald Trump’s inauguration, particularly as he refrained from imposing immediate trade tariffs. While uncertainty remains over potential tariffs on China, Canada, and Mexico, BofA expects greater clarity to shift sentiment positively.
BofA also noted that the anticipated BOJ rate hike, likely to occur this week, is mostly priced into the market, with futures indicating a 90% likelihood. The firm suggests that once the hike is announced, markets might adopt a view that additional hikes are unlikely until after Japan’s Upper House elections later this year. This could lead to the perception that negative catalysts have subsided, boosting investor confidence.
The investment bank favors domestically-focused Japanese stocks and niche exporters amid an uncertain economic outlook but also sees potential in quality cyclical stocks as foreign investor interest in Japan revives.
