Japan’s equity market is exhibiting patterns reminiscent of late 2023, according to a Bank of America (BofA) strategy report published on August 20, as structural shifts in U.S. debt operations and currency dynamics reshape investor positioning.
The U.S. Treasury will double the cap on buybacks of longer-dated government bonds to at least $4 billion per operation, effective between September 9 and November 4. The increase applies to securities maturing in 10-20 years and 20-30 years, up from the prior $2 billion limit. Analysts note this move could ease upward pressure on long-term yields, a factor that supported risk assets in late 2023 when U.S. economic data softened and inflation cooled, prompting markets to price in an end to Federal Reserve rate hikes.
BofA highlights key differences between the current environment and the late-2023 period. The yen has remained weak despite coordinated foreign-exchange intervention, while geopolitical risks in the Middle East have replaced the sharp decline in oil prices observed in late 2023. A potential manufacturing rebound could simultaneously lift Japanese corporate earnings and interest rates, with the Bank of Japan’s accelerated rate-hike expectations suggesting the tightening cycle may not yet be exhausted.
Strategically, BofA anticipates a shift away from momentum- and beta-driven gains toward greater stock selection. The report urges investors to exercise selectivity in artificial-intelligence-related equities, prioritizing earnings visibility and valuation discipline. Sectors that underperformed during the AI rally but posted strong first-quarter results—such as IT services, gaming, and intellectual-property companies—are viewed as potential beneficiaries.
Domestic-demand stocks could gain traction if the yen stabilizes, while small- and mid-cap growth names may recover if the currency’s depreciation halts. Value stocks are expected to maintain an advantage as long as interest rates continue rising, according to the analysis.
