Japan's yen may have finally stopped climbing, but Citi, expecting further currency strength ahead, cut the country's equities to "underweight."
"With expectations for yen strength winning the day, we do not think Japanese equities are likely to grow in appeal for investors," Naoki Iizuka, an analyst at Citi, said in a note Thursday.
The dollar/yen pair was forecast to head toward 97 over the next six to 12 months, Iizuka said in a separate report on Wednesday, citing expectations that the dollar would depreciate against G-10 currencies in the medium term.
Since the end of September, the yen has weakened against the dollar, with the currency pair rising from around 100 in late September to levels as high as 104.03 in early Friday trade.
Iizuka noted that Japanese stocks tended to outperform when both the dollar was rising against the yen and oil prices were falling, or vice versa. But next year, he expected both the yen and oil prices to rise simultaneously.
But for global investors, he recommended pursuing a strategy with no currency hedging, aimed at sectors that benefit from rising oil prices, such as mining, trading companies, construction equipment and marine transportation.
For Japan-market specialists, he recommended waiting until after the U.S. presidential election in early November to buy, then selling in May.
"Since 1980, investing in Japanese equities in the first week of November in U.S. presidential election years and selling at the end of the following May has generated an average return of 13-14 percent," he said. "Sectors tending to perform particularly well during those periods include financials, exporters, and cyclicals."
In his note Wednesday, he added that if Democratic candidate Hillary Clinton won the U.S. presidential election, it would be a good opportunity to shift away from domestic-demand stocks and defensives, and toward exporters and cyclicals.
Iizuka expected the Topix index would remain rangebound in yen terms and rise around 5 percent in dollar terms this quarter, after its 6.2 percent rise in yen terms and 8.0 percent rise in dollar terms in the July-September period.
Citi's target for the Topix at end-2017 was 1,525, compared with its close at 1,353.93 on Thursday.
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—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1