Investing.com– Japanese stocks have lagged global peers in recent months amid heightened political uncertainty in the country and a bleak outlook for the Bank of Japan, although this makes them attractively valued, according to Citi analysts.
Citi said Japanese markets were poised for a turn-of-the-year rally despite increased political uncertainty, with solid earnings and weak, relative resilience from the Japanese economy to drive this trend.
“With valuations that do not exceed historical averages, Japanese names appear increasingly attractively valued (price-to-share ratios) relative to global equities,” Citi analysts wrote in a note.
They predict a year-end rebound in Japanese markets, while noting the potential for sharp increases in forecasts from major companies.
A softer outlook for the U.S. economy and lower global interest rates are also expected to boost Japanese stocks, Citi said, and that even if narrowing rate differentials eventually supported the yen, this was unlikely to deter a year-end rebound. A weaker outlook for earnings in the second half of the year was also unlikely to affect Japanese markets.
Japan’s index hit a record high of more than 42,000 points in July. But the index has since struggled to reach those levels, especially when the Bank of Japan began raising interest rates.
While the BOJ reiterated its plans to eventually raise rates further during a recent meeting, investors had doubts about how much room the BOJ has to continue raising rates, given Japan’s uncertain political outlook.
A coalition led by the ruling Liberal Democratic Party lost its parliamentary majority in a recent election. The LDP will now have to seek coalitions with smaller regional parties, which could dilute its ability to implement radical political changes.
Japanese stocks had rallied on this prospect, especially when the yen fell sharply after the election. They also rose sharply this week after Donald Trump won the 2024 US presidential election, sparking a rally in the dollar and weighing on the yen.