(Bloomberg) -- The rally in Japan’s stocks is likely to give way by year-end, with a full-fledged economic rebound needed to sustain an uptrend in prices, according to Citigroup Inc.

The recent gains in Japanese equities have narrowed the gap between economic indicators and what the market has priced in, making it hard to justify higher prices without a recovery, strategists including Ryota Sakagami wrote in a note. Investors should brace for the risk of a correction going into year-end and early 2023, they added.

“The rally that has continued for the past month or so could well wind down soon,” the strategists wrote. “Our basic near-term investment strategy places defensive/value on the long side and cyclical/growth on the short side.”

The rise in stock prices since early October was in line with the peaking of long-term US interest rates, according to the strategists. Conversely, a renewed rise in long-term rates is likely to trigger a drop in share prices, they added.

Japanese equities outperformed their global peers in local currency terms this year as a weak yen boosted exporters’ earnings and a reopening of the economy revived consumption. Citigroup had earlier warned of “a sharp additional correction” in stocks heading into the first half of 2023 as the market hadn’t fully reflected the risk of a recession in major economies.

The yen has declined about 14% against the dollar this year, making it the worst-performing Group-of-10 currency. In dollar terms, the Nikkei 225 is down about 17% in 2022, versus a 16% decline in the MSCI All Country World Index.

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