Japanese stocks may have already found a short-term bottom, but the outlook remains highly sensitive to geopolitical risks,
particularly the evolving conflict in the Middle East, according to Bank of America.
The brokerage noted that the recent selloff in the Nikkei 225 likely marked a short-term bottom following a sharp spike in volatility—a pattern historically associated with market lows. However, whether this translates into a sustainable recovery depends on how quickly macroeconomic uncertainties subside.
The decline in Japanese stocks was exacerbated by a combination of factors, including Japan's reliance on imported energy and the rapid unwinding of overweight positions, particularly those related to artificial intelligence. Investors had been actively rotating into high-growth AI-related stocks, and the reversal triggered a significant decline as these positions were unwound.
BofA believes that stabilization in energy markets could be a key trigger for a rebound. Rising gasoline prices, especially ahead of the summer travel season in the US, could impact policy responses and investor sentiment. If energy costs continue to rise due to supply disruptions related to the Strait of Hormuz, pressure on global markets could persist.
The report emphasizes that Japan remains particularly vulnerable as a resource-poor economy. A prolonged disruption to shipping through the Strait of Hormuz would affect not only oil flows but also a wider range of commodities, including LNG, coal, and industrial metals, raising costs across all sectors.
BofA added that if geopolitical tensions ease in the coming weeks, Japanese stocks could resume their long-term uptrend, supported by solid corporate fundamentals, stable earnings revisions, and continued foreign investor participation. However, failure to resolve the tensions could lead to renewed volatility and potentially push markets below recent lows.
In terms of positioning, investors have recently favored companies with stable growth and high returns amid uncertainty, although high-yield and AI-related stocks could rebound sharply if conditions improve.
Looking ahead, the brokerage highlighted energy and resource companies as potential medium-term beneficiaries, as the current crisis highlights the importance of energy security and supply resilience.