Have supply-demand shocks passed for Japanese stocks? BoFA weighs in

Investing.com-- BoFA trimmed its year-end forecasts for Japan’s benchmark stock indexes, but said that markets could begin recovering in the coming month on improving corporate guidance and as inflation perks up.

BoFA said it expects Japan’s Nikkei 225 index to end 2024 at 40,500 points, compared to a prior target of 43,500 points. The TOPIX is expected to end at 2,800 points from earlier forecasts of 2,950 points. 

The brokerage said that while Japanese firms had performed well in the June quarter earnings season, most firms had still presented a conservative outlook on future earnings, which raised the chances of guidance hikes in the coming quarters.

But despite the positive earnings, the Nikkei and the TOPIX had both slumped into a bear market last week, as sentiment towards Japan was battered by hawkish signals from the Bank of Japan.

While both indexes did rebound sharply from last week’s losses, they still remained within a bear market.

BoFA said that recent volatility in Japanese stocks was potentially caused by supply-demand shocks, given that foreign investors had invested in Japanese markets while hedging their currency exposure. A sharp appreciation in the yen, on a hawkish BOJ, sparked a rapid unwinding in the yen carry trade over the past month. 

Still, BoFA expects Japanese markets to begin recovering by late-September or early October.

The brokerage said that it maintained its medium-term view that the main catalysts for Japanese stocks were increased inflation on “structural labor shortages” and corporate reforms in response to higher prices. 

They noted that while yen appreciation did present some risks to future earnings, it would still have a limited overall impact. 

“The market's future path will be determined by whether the market decline -- which seemed to price in a sudden deterioration in earnings -- was mostly due to anticipating a US recession or due to supply-demand factors,” BoFA analysts wrote.

But they envisioned a mostly soft landing for the U.S. economy, which could present more upside for stocks.

BoFA also expects markets to keep a mostly wait-and-see approach to Japanese stocks until the results of the Liberal Democratic Party election to pick Japan’s next prime minister, after Fumio Kishida said he will not stand for reelection.