Bank of America: Japanese stocks are recovering after a sharp decline, with hopes of accelerating rebound in November

On the 25th, Bank of America Merrill Lynch released a research report stating that the Japanese stock market is recovering after the sharp drop in August, and is expected to accelerate its rise starting from November.

Bank of America Merrill Lynch believes that there are three conditions for the recovery of the Japanese market, namely the accelerated rate cut by the Federal Reserve, the cautious attitude of the Bank of Japan towards rate hikes, and the upcoming election for the President of the Liberal Democratic Party of Japan.

The research report further points out that the first two conditions have been met, and now it depends on the third condition.

Federal Reserve Rate Cut: Reducing the Risk of Yen Appreciation

Firstly, the report indicates that the Federal Reserve decided to cut interest rates by 50 basis points, and the Fed's outlook still points to a soft landing, with the pace of rate cuts shown in the dot plot still below market expectations. This reduces the risk of yen appreciation, which is favorable for the Japanese stock market.

However, there is still uncertainty about the extent of the rate cut, especially as employment data may affect the pace of rate cuts.

The peak unemployment rate forecasted by the Federal Reserve is 4.4%, which is not significantly different from the current level (4.2%).

Bank of America Merrill Lynch states that although there are still concerns in the market about the future direction of the U.S. economy, these concerns have eased somewhat. As long as the Federal Reserve adjusts the real policy interest rate promptly, it should increase the likelihood of avoiding a recession.

Furthermore, although the expansionary fiscal policy of the U.S. federal government is the root of inflation, it is still supporting the economy.

In the U.S. presidential election, both Democratic and Republican candidates advocate increasing fiscal spending. If fiscal policy remains expansionary and the Federal Reserve is in a rate-cutting cycle, the likelihood of a severe economic downturn is not high.

Bank of Japan: Reasonable Pace of Rate Hikes, No Major Issues

On the 24th, Kazuo Ueda stated in a speech that if the data supports it, the central bank will raise rates again, but will not rush to do so. Some analysts believe that his remarks indicate that the likelihood of the Bank of Japan taking policy action at the next month's meeting is low.

Bank of America Merrill Lynch points out that the current stance of the Bank of Japan can be summarized in two key points:

1. The real policy interest rate is low, so there is room for rate hikes;

2. There is no rush.

The research report believes that historically, when the market digests a probability of rate hikes exceeding 60%, market adjustments intensify. However, even with a basic policy of rate hikes, as long as it is ensured to be moderate, no major market fluctuations are expected.

Economists at Bank of America Merrill Lynch predict that if the Bank of Japan raises rates by 25 basis points in January and in July-September next year, there is no need to significantly change their view on the Japanese stock market.

Liberal Democratic Party Presidential Election: Short-term Market Volatility Should Be Temporary

Bank of America Merrill Lynch points out that it is difficult to predict the results of the Liberal Democratic Party presidential election held on September 27th, due to the large number of candidates and the market has not fully digested various possibilities. After the election results are announced, the stock market may experience significant fluctuations Despite the possibility of significant short-term volatility, in the long term, regardless of who is elected, the overall policy direction of the Japanese government is unlikely to change significantly. The new leader will continue the main policies proposed by Fumio Kishida, such as raising wages and promoting digital transformation.

The research report believes that similar to the 2021 election, the market volatility after this election may just be an adjustment to the high market sentiment before the election