Japan stocks eye positive 2025; local catalysts to offset tariffs blow, BofA says

Japanese stocks are headed into a positive 2025, BofA analysts said in a note, with improvements in the domestic economy likely to offset most headwinds from U.S. trade tariffs. 

BofA expects the Nikkei 225 index to finish 2025 at 43,500 points, and the TOPIX to reach 3,050 points, representing a 10% upside from current levels. BofA's forecasts were more positive than those presented by UBS, which expects a 5% upside in 2025.

2025 is expected to mark the first year in 30 for inflation to become entrenched in the Japanese economy, BofA said, driven by persistently higher wages, economic stimulus measures and tax reforms.

BofA said Japanese stocks were likely to remain unchanged in the first half of 2025, as strong domestic factors expected to only partially offset foreign headwinds. But stocks are then expected to pick up pace in the second half of the year.

“We expect Japanese stocks to gain momentum as they price in US tax cuts, a boost from Chinese government policy, a recovery in the manufacturing cycle, and rising ROE. We also expect the US government to implement policy more quickly than under the first Trump administration,” BofA analysts said. 

The brokerage expects strong EPS growth in Japanese companies, while gross domestic product growth and inflation is also expected to pick up next year. 

In the near-term, BofA recommended prioritizing sectors with earnings stability and exposure to domestic demand. This includes sectors such as financials, construction, services, IT, games, and broadcasters. 

The brokerage expects a “full-scale” rally in cyclicals and China-related sectors in the second half of 2025.  US trade impact to be front-loaded in 2025, expect tax cuts later

With regards to the impact of U.S. policy, BofA said that the U.S. was likely to implement trade tariffs first in 2025, given that the authority to do so lies with the President.

This is expected to front-load the impact of increased tariffs on stock valuations, although an improvement in domestic conditions in Japan is expected to offset these headwinds. 

BofA also noted that the Japanese economy was less exposed to China than Trump’s previous term, indicating that the impact of new trade tariffs will be limited. 

U.S. tax cuts will require Congressional approval, and will provide a boost to sentiment later in 2025. 

 

Source: Investing.com