Investing.com — Bank of America strategists say Japan’s equity market is entering a pivotal phase as investors await the outcome of the Lower House election, with a clear upside scenario if the Liberal Democratic Party (LDP) secures an outright majority.
The Wall Street firm outlines three post-election paths, led by a bullish case in which the market extends its rally through mid-year, driven primarily by core large-cap stocks.
If the ruling coalition gains seats but the LDP falls short of a majority, BofA expects little change to the broader positive backdrop, while a failure to win a majority could spark market turmoil in the near term, with investors likely rotating toward defensive and high-dividend stocks before the market stabilizes.
In its base bullish scenario, BofA strategist Masashi Akutsu says he expects “a concentration of market positives in the first half of the year,” pointing to the potential for rising real wages, upward earnings guidance revisions, stronger share buybacks, and revisions to Japan’s Corporate Governance Code aimed at reexamining cash allocation and strengthening accountability.
Corporate profits have already resumed growth in the first half of the fiscal year, while companies’ full-year guidance remains conservative. Akutsu notes that constituents have lifted their earnings per share (EPS) guidance for the financial year 2026 (FY26) to 6.7%, even as net profit forecasts still assume a 2.9% decline based on an average exchange rate of 145.3 yen per dollar.
The strategist also highlights that share buybacks surged through last year’s results season before slowing on tariff concerns, with execution of announced programs running behind normal pace — a backdrop it sees as supportive if earnings outlooks improve.
If the LDP wins outright, Akutsu believes a protracted rally could follow. Under such an outcome, “a bullish scenario is likely with the rising as far as 60,000,” he wrote, as rising return on equity (ROE) supports higher valuation levels.
ROE has already climbed to 9.8%, above the top of its previous range, and BofA argues continued improvement could encourage greater participation from European and U.S. investors who have only gradually begun increasing exposure to Japanese equities.
Based on higher ROE and a higher P/E multiple, Akutsu forecasts TOPIX approaching 4,000 and the Nikkei just under 59,000 over the next 12 months.
BofA also plays down fears around higher interest rates, saying Japan has entered a “world with interest rates” alongside inflation. Akutsu characterizes the recent post-dissolution surge in yields as panic selling in Japanese government bonds and expects the rise to pause as the ruling coalition moves to pass an initial FY2026 budget and fiscal catalysts fade, with policy attention shifting toward growth strategies after the election.
On stock selection, the strategist has a clear preference for companies with pricing power in an inflationary environment.
“We like external demand sectors with strong themes such as AI and physical AI, defense, shipbuilding, and energy,” Akutsu said in the note. He also points to domestic demand sectors — including finance, construction, real estate, and railways — as potential beneficiaries if easing cost-push inflation allows real wage growth to turn positive.
Geopolitical tensions further reinforce these preferences, with Akutsu highlighting ongoing catalysts for the defense industry, rising investment in energy infrastructure tied to AI demand, and accelerating interest in factory automation and robotics as labor shortages and reshoring efforts intensify.
He also flags a broad-based rise in material prices, including and aluminium, arguing the move reflects structural factors such as underinvestment in capacity, tariff distortions, higher power costs linked to data-center expansion, labor disruptions, and weather-related supply issues — rather than a temporary spike.
Overall, BofA sees the Lower House election as a potential inflection point that could concentrate multiple positive drivers for Japanese equities in the first half of the year, particularly if an outright LDP victory strengthens expectations for growth-oriented policy and improving corporate returns.