Investing.com- Japanese stock markets are expected to benefit from an improving local economy in the coming years, UBS analysts said in a note, although they still anticipate trade-related headwinds from increased U.S. tariffs.
UBS expects the benchmark to end 2025 at 41,500 points and to close next year at 2,900 points, roughly 5% higher than current levels but slightly lower than UBS’s previous forecast.
The brokerage expects increased US tariffs under President-elect Donald Trump to have a negative effect on Japanese companies, especially those with export exposure.
But UBS also expects the Japanese economy to post nominal growth amid sustained inflation and higher wage increases. The brokerage said Japan’s planned corporate governance reforms also increase the potential for higher shareholder returns and better overall value.
However, UBS also warned that a high-tariff scenario would make it harder for the Japanese economy to avoid recession, with the brokerage recommending a shift to sectors exposed to domestic demand.
Japan’s domestic sectors will improve in the coming years
UBS expects the Bank of Japan to raise its benchmark rate to 1% by the end of 2025, amid improving wage growth and sustained inflation. Personal consumption is expected to benefit greatly from this trend.
“We are bullish on consumption-related sectors such as retail and food, which have lagged Japan’s stock market over the past two years, believing that the momentum behind the recovery in consumption and industry restructuring will pick up alongside real wage growth,” they wrote. UBS analysts in a note.
The brokerage also recommended sectors such as housing, real estate, IT services and telecom for their exposure to local demand.
But UBS noted that political turmoil in the country could pose downside risks, particularly after the coalition led by the ruling Liberal Democratic Party failed to win a majority in the recent general election.
