Will the Frenzied Rally of Japanese Stocks Repeat? BofA: Investors' Interest in Japanese Stocks Rises as U.S. Stocks Are Overvalued

Recently, analysts from Bank of America (BofA) stated that as US stock valuations rise, more and more investors are seeking diversification, with a notable increase in interest in Japanese stocks among many investors.

In a report to clients, BofA strategists led by Akutsu Masashi wrote that from a series of meetings with investors worldwide, they found that global investors' interest in the Japanese stock market was "more positive than we had anticipated."

They pointed out that European investors generally maintain a neutral allocation weighting for Japanese stocks, while Canadian investors have a weighting of "overweight or slightly overweight."

However, in the US, investors with experience in the Japanese stock market tend to be "underweight" on Japanese stocks, with many believing that the Japanese stock market "lacks catalysts."

The analysts wrote: "However, the recent number of investors interested in Japanese stocks has surprised us, reminding us of the period 1-2 years ago when Asian investors shifted funds into Japanese stocks, triggering a significant rally."

From 2023 to 2024, the Japanese stock market saw strong inflows of foreign capital, and the "Oracle of Omaha" Warren Buffett's investments in Japan's five major trading houses further fueled investors' enthusiasm for Japanese stocks, pushing the Nikkei 225 index to a 33-year high.

BofA stated that one of the biggest drivers for global investors' current investments in Japanese stocks is the overvaluation of US stocks, prompting investors to seek diversification beyond the US market.

BofA analysts added that signs of accelerated corporate reforms in Japan and signs of Japan's transition toward an "inflationary economy" have also attracted investors.

Although BofA noted that it is still too early to say that there has been a "surge" in investors' interest in Japanese stocks, they warned that "this quiet shift in capital allocation... has already led to 10 consecutive weeks of net buying of Japanese stocks by foreign investors."

However, some concerns remain for the Japanese stock market, particularly as the trade outlook between the US and Japan remains clouded. Currently, the US suspension of "reciprocal" tariffs on many countries, including Japan, is set to expire early next month, and there is also a high degree of uncertainty surrounding discussions between the US and Japan on a new trade agreement.