Japan stocks: Bad news, BOJ rate hike gradually priced in, BofA says

Investing.com– Japanese stocks have traded largely rangebound so far in 2024 after logging strong gains in the past year, with BofA analysts noting that a slew of negative factors for local markets may already be priced in.

The index was trading flat so far in 2025 after adding nearly 20% in the past year, with BofA analysts noting that the index reacted positively to U.S. President Donald Trump’s inauguration, especially given that he did not impose trade tariffs as feared. 

“We believe this represents a first step toward the market pricing in an end to bad news following the negative effect on financial conditions from the jump in US long-term yields since late-December 2024,” BofA analysts said in a note. 

Still, markets remained uncertain over the near-term outlook for tariffs, given that Trump did threaten 10% tariffs against China and 25% tariffs on Canada and Mexico. But BofA expects clarity on tariffs to drive more bets that the bad news is over. 

BOJ rate hike already priced in, BofA says 

BofA noted that a stronger yen and fears of an interest rate hike by the Bank of Japan in January were likely capping gains in Japanese markets. 

But BofA believes that the rate hike- which is – is priced into markets, with futures signaling an over 90% chance of a hike. 

BofA noted that if the BOJ does hike rates now, the market is likely to adopt the view that further hikes will be unlikely until at least after the Upper House elections later this year. 

“The market could well conclude after the BoJ’s January meeting that negative catalysts are out for now,” BofA analysts said. 

The investment bank reiterated its focus on domestically-exposed Japanese stocks and niche exporters  on the basis of an uncertain economic outlook. 

But BofA noted that a “growing sense that bad news is priced in” could also make quality cyclical stocks appear more attractive, with such trend likely to be strengthened by a recovery in foreign investor flows into Japan.