Japanese equity markets appear to have stabilized after the announcement of a two-week ceasefire between the U.S. and Iran, a development that BofA Global Research says increases the likelihood that a definitive bottom has formed.
In a strategy report, BofA strategists describe the halt in hostilities as providing a reprieve for markets that had been weighing the potential effects of further disruption to maritime trade. The analysts stress that while the temporary calm makes a rebound more probable than a prolonged correction, the longer-term path for equities remains conditional on whether global supply chains can reopen safely.
Short-term resilience to energy shocks
The report highlights an unexpected steadiness in Tokyo-listed stocks through the episode of conflict. One proximate signal of that stability is the relative constancy of the TOPIX price-to-earnings ratio. BofA points to a distinction between near-term and distant oil contracts as a key factor: near-maturity WTI futures experienced sharp moves, while farther-dated crude futures held steady. That pattern, the analysts say, indicates the market has largely priced in a brief disruption in energy costs rather than a sustained structural shift.
Historically, Japanese equities have shown an ability to absorb short-lived spikes in energy prices. BofA notes that if the current disruption proves transient, the effect on corporate earnings should be limited. The report, however, draws a clear line between short-term turbulence and a scenario in which shipping constraints persist.
Longer-term exposure for industry and manufacturing
The strategists warn that a prolonged closure or restriction affecting the Strait of Hormuz would materially increase pressure on Japan's industrial and manufacturing sectors. In that scenario, the effects on corporate performance would be significantly more pronounced than under a short-lived shock, and the market's earlier assessment of a temporary interruption would be challenged.
Verification is the next critical step
While the ceasefire has provided market relief, BofA emphasizes that investors now need to verify that the pause in hostilities endures. The reopening of the Strait of Hormuz is framed by the report as the ultimate litmus test for a sustained market recovery. The strategists single out talks in Islamabad as a diplomatic window that must deliver a tangible reopening of maritime trade; if those discussions fail to secure a durable shipping agreement, the current market bottom could face renewed testing from a fresh wave of stagflationary pressures.
Given these dynamics, the current investment stance recommended by the report concentrates on high-quality Japanese companies that already reflect substantial "war premiums" in their valuations. BofA suggests that if the ceasefire persists and de-mining work in the Gulf begins to produce visible results, the path of least resistance for both the Nikkei 225 and TOPIX is likely upward. The strategists caution, though, that the peak of market concern has only truly passed if the diplomatic efforts in Pakistan translate into a clear reopening of maritime commerce.
Sector impact note - The analysis draws particular attention to industrial and manufacturing sectors for their vulnerability under prolonged shipping disruptions, while broader market indices such as the Nikkei 225 and TOPIX are described as sensitive to confirmation that trade routes are reopening.