‘Buy Japan’ narrative may be underway in stocks, BofA says

BofA analysts express increasing optimism for Japanese equities, citing strong quarterly earnings and expectations for upward guidance revisions, which are driving a 'Buy Japan' trend reflected in record highs for the Nikkei 225 and TOPIX. Despite an overall profit decline in the fiscal first quarter, U.S. tariff impacts were less severe than anticipated, with companies effectively passing on higher costs and adjusting supply chains, suggesting a clear path to earnings recovery. A softer yen continues to benefit exporters, and strong share buybacks are expected, further bolstering the bullish outlook for the region.

Analysis

Bank of America analysts have adopted a strongly optimistic outlook on Japanese equities, citing a confluence of positive factors that suggest a durable 'Buy Japan' trend is emerging. Despite an overall decline in fiscal first-quarter profits, underlying corporate performance is viewed as solid, with U.S. tariff-related headwinds proving less severe than anticipated. Companies are demonstrating resilience by effectively passing on higher costs and adjusting supply chains, creating a clear path toward an earnings recovery. This is supported by the record highs achieved by the Nikkei 225 and TOPIX indexes, a weaker yen benefiting exporters amid Bank of Japan policy speculation, and the expectation of continued strong share buybacks. Critically, corporate guidance for the upcoming quarters has been largely conservative, which sets a low bar and increases the probability of significant upward revisions throughout the rest of the fiscal year. BofA highlights a preference for non-manufacturing sectors, which are showing stronger performance compared to the earnings deterioration seen in manufacturing and industrial segments.

Key Decisions for Investors

• Investors could consider increasing exposure to Japanese equities, particularly focusing on non-manufacturing sectors that are demonstrating superior earnings resilience.
• The conservative corporate guidance is a key pillar of the bull case, so investors should closely monitor upcoming earnings reports for the anticipated upward revisions, which would validate the positive outlook.
• Given the stated benefit of a softer yen for exporters, it is crucial to track currency movements and Bank of Japan policy signals, as a significant appreciation of the yen could present a headwind.
• Note the expectation for continued strong share buybacks, especially around the fiscal half-year reporting season, which could provide an additional catalyst for equity prices.