Japanese stock markets are expected to grow due to an improving local economy, according to UBS analysts. They project a 5% increase in the benchmark index by the end of 2025, reaching 41,500 points.
However, the potential impact of increased tariffs imposed by the United States under President-elect Donald Trump's administration is a concern. These tariffs could negatively affect Japanese firms heavily reliant on exports.
Despite this, UBS remains optimistic about Japan's economic trajectory, anticipating growth driven by sustained inflation and rising wages.
Corporate governance reforms in Japan are also expected to enhance shareholder returns and overall market value.
However, a scenario with high tariffs could push the Japanese economy into recession, leading to a shift towards sectors catering to domestic demand.
UBS analysts recommend focusing on consumption-related sectors, such as retail and food, which have underperformed in the stock market. They anticipate a recovery in consumer spending and industry restructuring, benefiting private consumption.
Sectors like housing, real estate, IT services, and telecommunications are also recommended, as they are expected to benefit from local demand.
The Bank of Japan is predicted to raise its policy rate to 1% by the end of 2025, further supporting the growth of these sectors.
Political instability poses a risk to Japan's economic recovery, as the recent general elections resulted in a coalition led by the ruling Liberal Democratic Party failing to secure a majority. This raises concerns about potential governance challenges and their impact on investor confidence and economic reforms.
Monitoring the political landscape closely is crucial, as any significant shifts could affect the broader economic environment and the performance of Japanese stocks.
Despite potential headwinds from increased tariffs and political uncertainty, the Japanese stock market is expected to grow due to local demand and consumption. Investors are advised to consider sectors with strong domestic exposure in the evolving market landscape.