Investing.com-- Bank of America (BofA) analysts expect Japanese equities to benefit from a deeper-than-expected U.S.-China tariff reduction, though near-term momentum may slow after a sharp rally, according to a research note.

The U.S. and China agreed on May 12 to cut tariffs on each other’s imports by 115 basis points, a move that surprised markets and spurred gains in Japanese stocks.

BofA strategists noted that the reduction aligns with a pattern of easing uncertainty, similar to trends seen in 2019 during the U.S.-China trade war.

While the Nikkei 225 and TOPIX have rebounded, BofA cautioned that price-to-earnings (P/E) ratios have caught up to revised estimates, potentially capping further near-term upside.

The analysts set tentative targets of 2,855 for TOPIX and 39,300 for the Nikkei, assuming a P/E of 14x.

Longer-term, BofA remains cautiously bullish, citing potential catalysts such as U.S. tax cuts, supply chain restructuring, and corporate reforms in Japan.

High-beta cyclical stocks, particularly China-exposed sectors like semiconductors and electronics, could rally in the short term after years of underperformance, analysts added.