Japanese Stock Market Set for Stronger Recovery in Late 2023
Positive Trends in Japanese Stock Market Recovery
Japanese stocks have faced significant challenges, particularly following a sharp decline in August. Analysts from BofA are optimistic that a recovery in the Japanese stock market will gain momentum as we approach the final months of the year. This anticipated improvement is largely attributed to an expected resolution of uncertainties surrounding both U.S. and local elections.
Nikkei 225 and TOPIX Performance Overview
The Nikkei 225 and TOPIX indexes suffered greatly, entering a bear market at the start of August, primarily due to a stricter monetary stance from the Bank of Japan and a strengthening yen. Despite a notable rebound since then, these indexes are still trading below earlier highs experienced in the year.
Outlook for November
BofA analysts forecast that the recovery will truly accelerate from November onward, particularly as the U.S. presidential elections conclude. Anticipated candidates, including Donald Trump and Kamala Harris, are expected to engage in a closely contested race.
Impact of Corporate Earnings
November is also a significant month for Japanese corporations, as they will report their half-year earnings. These reports will provide crucial insights into how the recent yen appreciation has affected profitability. BofA does not foresee any substantial deterioration in earnings, suggesting resilience among Japanese companies.
Sector Preferences and Economic Indicators
When it comes to stock selection, BofA favors companies with a strong domestic demand component. Recent data indicates that private consumption in Japan has shown signs of improvement, hinting at a more robust economic environment. Furthermore, the brokerage recommends high-quality cyclicals, banking on a looser monetary policy trajectory in Japan's key overseas markets.
Potential Market Volatility and Political Landscape
This week, the ruling Liberal Democratic Party (LDP) of Japan will conduct its leadership elections, potentially shaping the country’s political path forward. While some market fluctuations are likely after the elections, the consensus is that the forthcoming leader will maintain the current policy orientation, leading to minimal disruption.
Short-Term Effects of Leadership Change
BofA suggests that the impact of these elections will likely be short-lived. However, a leadership transition may slightly postpone the Bank of Japan’s plans for further interest rate hikes, which could, in turn, restrain any substantial strengthening of the yen.
Long-Term Market Sentiment
Overall, BofA assesses that Japanese equity markets are already on a path to recovery. The prevailing risk sentiment is projected to stabilize and improve within two to three months following the earlier downturn.
Frequently Asked Questions
What factors are driving the recovery of Japanese stocks?
The anticipated recovery is influenced by the resolution of political uncertainties, insights from corporate earnings reports, and improving domestic demand.
How have the Nikkei 225 and TOPIX indexes performed recently?
Both indexes fell into a bear market in August but have shown signs of recovery, although they remain below earlier highs.
What sectors does BofA recommend for investment?
BofA recommends focusing on stocks with strong domestic demand and high-quality cyclicals due to expected looser monetary policies.
What is the expected impact of the LDP leadership elections on the market?
While some volatility is expected, the new leader is likely to continue current policies, leading to minimal disruption in the market.
When can we expect to see improvements in market sentiment?
Improvement in market sentiment is anticipated within two to three months post-recovery following August’s market crash.
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