Investing.com — Japanese equity markets may have reached a definitive bottom following the announcement of a two-week ceasefire between the U.S. and Iran.
According to a new strategy report from BofA Global Research, while Japanese stocks have been at a crossroads, the temporary halt in hostilities has made a recovery more likely than an extended correction.
Analysts suggest that Japan possesses strong short-term resilience to energy price spikes, though the long-term outlook remains tethered to the safe reopening of global supply chains.
Resilience amid energy volatility
The Tokyo market’s stability during the recent conflict has surprised some observers. BofA notes that the P/E ratio has remained relatively steady, largely because distant crude oil futures have stayed stable even as near-maturity WTI prices surged.
The trend suggests that the market had already priced in a relatively short-term disruption rather than a permanent structural shift in energy costs.
Japanese equities have historically shown a capacity to weather brief periods of high energy costs. Analysts point out that if the current disruption ends quickly, the impact on corporate earnings will likely be negligible.
However, the report warns that if constraints on the Strait of Hormuz persist, leading to a “long-term disruption,” the impact on Japan’s industrial and manufacturing sectors will become significantly more pronounced, echoing historical energy crises.
Verification of facts is “next critical step”
The recent ceasefire has provided a much-needed reprieve, but BofA emphasizes that the next phase for investors is the verification of a durable peace. The reopening of the Strait of Hormuz remains the ultimate litmus test for the market’s recovery.
Should the Islamabad talks fail to secure a permanent shipping agreement, the current “bottom” in Japanese equities could be tested by a renewed wave of stagflationary pressure.
Currently, the investment strategy remains focused on high-quality Japanese names that have already priced in significant “war premiums.”
BofA suggests that as long as the ceasefire holds and de-mining efforts in the Gulf begin to show progress, the path of least resistance for the and TOPIX is likely to the upside.
Still, the report cautions that the “peak of concern” has only passed if the diplomatic window in Pakistan leads to a tangible reopening of maritime trade.
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