Citi analysts believe Japanese stocks, which have underperformed their global counterparts recently due to rising political uncertainty and an unclear outlook for the Bank of Japan, are now attractively priced.
Despite these challenges, Citi expects a rally in the Japanese market through the end of the year, driven by strong corporate earnings, a weak yen, and the country’s economic resilience.
“With valuations in line with historical averages, Japanese stocks appear increasingly appealing in terms of price-to-earnings ratios compared to global peers,” the analysts noted.
They project a year-end rally for Japanese equities and highlight the potential for upward revisions in earnings guidance from major companies.
Citi also pointed out that a weaker outlook for the U.S. economy and lower global interest rates will likely support Japanese stocks. Even if narrowing interest rate differentials eventually strengthens the yen, Citi believes this won’t prevent a year-end rally. Additionally, despite a softer earnings outlook for the year’s second half, it’s unlikely to dampen sentiment in the Japanese market.
Japan’s Nikkei 225 index hit a record high of over 42,000 points in July but has since struggled to regain those levels, especially as the Bank of Japan started raising interest rates.
Although the BOJ has reiterated its intention to continue raising rates in the future, investors remain uncertain about how much room the central bank has for further hikes, given the country’s political instability.
In a recent election, a coalition led by Japan’s ruling Liberal Democratic Party (LDP) lost its parliamentary majority, forcing the LDP to seek alliances with smaller, regional parties. This shift could limit its ability to implement significant policy changes.
Despite this, Japanese stocks rallied on the back of these developments, particularly as the yen weakened sharply following the election results. The market also surged this week after Donald Trump’s victory in the 2024 U.S. presidential election, which triggered a dollar rally and further pressured the yen.
