Have supply and demand shocks passed for Japanese stocks? BoFA Weighs In By Investing.com

Investing.com– The BoFA cut its year-end forecast for Japan’s benchmark stock indexes, but said markets could start to recover next month as corporate guidance improves and as inflation picks up.

The BoFA said it expects Japan’s index to end 2024 at 40,500 points, compared with an earlier target of 43,500 points. It is expected to end at 2,800 points against earlier forecasts of 2,950 points.

The brokerage said that while Japanese firms fared well in the June quarter earnings season, most firms still presented a conservative outlook on future earnings, raising the chances of an increase in guidance in the coming quarters.

But despite the positive gains, the Nikkei and TOPIX both fell into a bear market last week as sentiment towards Japan was hurt by dovish signals from the Bank of Japan.

While both indexes rebounded sharply from last week’s losses, they still remained in a bear market.

The BoFA said recent volatility in Japanese stocks was potentially caused by supply-demand shocks, as foreign investors poured into Japanese markets while hedging their currency exposure. A sudden appreciation of the yen, on a demanding BOJ, triggered a rapid decline in yen trading over the past month.

However, BoFA expects Japanese markets to start recovering by late September or early October.

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

They noted that while the appreciation of the yen posed some risks to future earnings, it would still have limited overall impact.

“The future trajectory of the market will be determined by the market decline – which

seemed to be pricing in a sharp deterioration in earnings — it was largely due to the anticipation of a

US recession or due to supply-demand factors,” BoFA analysts wrote.

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

BoFA also expects markets to maintain a more wait-and-see approach to Japanese stocks until the results of the Liberal Democratic Party’s election to choose Japan’s next prime minister after Fumio Kishida said he would not run for re-election.