Investing.com-- Bank of America (BofA) analysts expect Japanese equities to extend gains through year-end, driven by improving trade terms and accelerating corporate reforms, though near-term challenges may cap upside.

The TOPIX index has rebounded sharply from an April selloff, but BofA strategists cautioned that price-to-earnings ratios have caught up to revised estimates, and corporate guidance remains cautious amid lingering U.S.-Japan trade uncertainty.

However, two key catalysts could fuel further gains: falling resource prices and a gradual yen appreciation, which are reversing the drag from post-Ukraine war inflation, and a surge in corporate restructuring, according to BofA.

Share buybacks are running at twice last year’s pace, and tender offers like NTT’s (TYO: 9432 ) bid for NTT Data (TYO: 9613 ) highlight growing momentum in unwinding inefficient parent-subsidiary structures, BofA analysts wrote.

They attribute the trend to pressure from regulators, activist investors, and inflation-driven demands for capital efficiency.

BofA recommended focusing on domestic-demand sectors like IT services, real estate, and select retailers, as well as "quality cyclicals" with pricing power. Small-cap growth stocks and firms undergoing governance reforms also offer opportunities, they noted.

While risks remain—including potential downward earnings revisions—the analysts argued that Japan’s improving terms of trade and structural reforms create a "unique catalyst" for outperformance.