BofA Securities said Japanese equities were set for strong gains through the first half of 2026, backed by solid corporate results, policy support, and potential wage growth, though near-term external risks still warranted caution.
The bank said in a recent note that 57% of companies had reported earnings that beat expectations in the ongoing first-half results season, with net profits rising 9.8% year-on-year. It expected upward revisions to EPS forecasts and full-year guidance as companies’ assumptions on the yen and profits appeared conservative.
Share buyback activity remained limited, but BofA expected announcements to increase toward the fiscal year-end, supported by strong profits and rising valuations. It also saw wage negotiations in spring 2026 leading to higher pay, reinforcing domestic demand and equity market sentiment.
On the macro front, the report said Prime Minister Sanae Takaichi’s administration was pursuing proactive fiscal measures in 17 strategic fields, such as semiconductors, energy transition, and defense, marking a shift from short-term budget balance goals toward sustained growth. A possible Lower House dissolution around spring 2026 could help solidify the government’s policy agenda.
Still, analysts warned of risks from U.S. economic data following the end of the government shutdown, saying strong employment or inflation readings could delay Federal Reserve rate cuts and weigh on global liquidity.
The rally in high-beta and AI-linked stocks could lose momentum, though past cycles suggested these names might regain strength by early 2026. BofA advised investors to maintain core holdings in AI stocks while rotating into undervalued sectors with improving earnings visibility. The strategists highlighted companies such as Hitachi, Murata Manufacturing, and Sumitomo Electric among firms showing earnings upgrades and manageable valuations, suggesting opportunities remained even as momentum slowed.
BofA said the combination of earnings growth, policy catalysts, and structural reforms continued to underpin a favorable medium-term outlook for Japan’s equity market.
Japan’s Nikkei 225 index is trading up 30% so far in 2025, having benefited from optimism over looser fiscal conditions under Takaichi, while a weak yen also supported exporters.
