After Goldman Sachs, Citigroup is also optimistic about Japanese stocks: they may peak in the short term, but have great medium- to long-term potential. The Nikkei could reach 70,000 points by the end of the year!
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Following Goldman Sachs' raise of the target price for the Tokyo Stock Exchange Index, Citigroup has also joined the camp bullish on Japanese stocks. Citigroup believes that Japanese stocks may temporarily peak in the short term, but the upside potential before the end of the year remains significant, with the Nikkei 225 Index high point estimated at 72,000. The consecutive statements from two major Wall Street institutions provide new support for the recent strong performance of the Japanese stock market.
According to Chase Wind Trading Desk, the Japanese stock strategy team at Citigroup Research published a report on June 2nd, with chief author Ryota Sakagami explicitly stating: "Japanese stocks may temporarily peak in the short term, but the upside potential before the end of the year remains significant. There is no need to change the bullish stance toward Japanese stock fundamentals." Citigroup also simultaneously raised the TOPIX target to 4,500 points, corresponding to a 17.5x price-earnings ratio and an EPS forecast of 258.4 yen for the fiscal year ending March 2028; the Nikkei 225 Index high point is estimated at 72,000 points, and a "breakthrough to 70,000 points before year-end."
The core logic of this judgment lies in: Earnings, ROE, and capital flows—all three main lines—have not signaled the end of their trends. Short-term pressures are caused by conservative initial corporate guidance leading to earnings forecast revisions, rather than a collapse of fundamental earnings. Meanwhile, Japanese companies' strengthened pricing power continues to provide room for margin improvement, which is also the key basis for the report's maintained mid- to long-term bullish position.
Goldman Raised Targets First, Citigroup Follows Closely
Just before Citigroup's report, Goldman Sachs had already in its latest "Japan Weekly Strategy Report" raised the 12-month target for the Tokyo Stock Exchange Index from 4,200 to 4,400, implying about an 11% increase from current levels—one of the top among major global markets.
Goldman analysts Bruce Kirk and Julius Chan raised their EPS growth forecasts for FY26/27 from the previous +7%/+11% to +11%/+11%, and added a FY28 forecast of +9% EPS growth, setting 3-month and 6-month target prices at 4,100 and 4,200, respectively.
Goldman cited three main driving forces: Japanese companies' earnings season exceeding expectations, prompting significant EPS upward revisions and three-year cumulative earnings growth expected to reach 33%; since April 2025, cumulative net foreign inflows have reached 16 trillion yen; and corporate shareholder returns are at historic highs, with current valuations still having room to recover to target multiples.
Citigroup's logic closely echoes Goldman's but delves deeper in detail, focusing particularly on corporate pricing power, boundaries of interest rate risk, and sector rotation pathways.
Short-Term Pressure Comes from Earnings Revision, Not Earnings Collapse
The Nikkei 225 and TOPIX have recently hit new annual highs, with the market having digested some positives in advance. If corporate profit plans subsequently fall short of market expectations, earnings forecast revisions may weaken in the short term, exerting downward pressure on stock prices.
However, this is not a scenario of "earnings collapse." TOPIX component companies plan for revenue to grow 4.2% year-on-year, operating profit to grow 8.2%, and net profit to grow 7.6%. Compared to previous consensus expectations, revenue is essentially flat, operating profit is 6.3% lower, and net profit is 4.9% lower—profits are indeed conservative but not out of control.
The sector structure further confirms this judgment. The electrical and precision sector plans for net profit to grow 56.2% year-on-year, operating profit to grow 21.4%; overall manufacturing sector net profit is planned to grow 19.5%; foreign-demand-related companies plan net profit growth of 16.8%. High-tech and semiconductor chains continue to elevate the overall earnings base, with short-term adjustments more a matter of pace rather than direction.
Pricing Power is the True Variable for Earnings Improvement
The report points out, there are many companies whose revenue plans beat market expectations, but just as many whose profit plans fall short of market expectations. Companies are willing to raise sales forecasts but remain cautious on margins, reflecting uncertainty about whether costs can be fully passed on.
A similar situation occurred in the fiscal years ending March 2023 and March 2024, when the path was first under pressure and subsequently price hikes improved margins. Currently, Japanese companies' ability to pass on import cost changes via price is smoother than before. Brent oil price changes affect import prices with about a 2-month lag, import prices affect company prices with another 2-month lag, and company prices affect core CPI with a 6-month lag, with B2B pass-through generally faster than B2C.
This means companies where "revenue guidance beats expectations but profit guidance lags expectations" are worth special attention. If subsequent price hikes are realized and margins do not deteriorate as initial guidance suggested, these companies may actually see upward earnings revisions. In the baseline scenario, TOPIX EPS will rise from 209.4 yen for the fiscal year ending March 2026, to 230.6 yen for FY March 2027, and then up to 258.4 yen for FY March 2028, corresponding to growth rates of 10.1% and 12.1%, respectively; ROE is expected to rise gradually from 9.8% to 11.1%.
Valuations Aren't Cheap, but ROE Rise Supports High P/E Ratios
TOPIX's current 12-month forward P/E is 16.8x, close to the upper end of the range from the past decade, so by valuation alone it isn't cheap. However, the core logic of valuation expansion isn't sustained capital inflows, but whether ROE can continue moving upward.
At present, TOPIX's 12-month forward ROE is 10.2% and P/B is 1.74x. If average ROE moves toward the 11%-12% range, a P/E above 17x no longer appears abrupt. The global financial environment remains relatively loose, and the number of Japanese companies with ROE below capital costs continues to decline, further boosting Japanese stocks' appeal to foreign capital; looking at yield spreads, Japanese equities remain competitive versus other major markets.
Based on this framework, TOPIX's target is set at 4,500 points, calculated as 17.5x P/E times the EPS forecast of 258.4 yen for FY March 2028.
Nikkei Outperformance Over TOPIX Unlikely to Reverse in the Short Term
The Nikkei 225/TOPIX ratio (N/T ratio) is currently at a historic high due to larger gains in AI and semiconductor-related stocks, to which the Nikkei 225 is more sensitive.
The report evaluates tech sector valuations via the PEG ratio: MSCI Japan IT has a current 12-month forward P/E of 24.7x, PEG of 1.3; Japan's semiconductor sector has a 12-month forward P/E of 22.2x, PEG of 0.8. Compared to looking solely at P/E, earnings growth absorbs much of the high valuation, and tech stocks aren't in an obviously overheated state.
Therefore, the report maintains a high N/T ratio as the baseline path. If the N/T ratio reaches 16x, that corresponds to a Nikkei 225 peak of about 72,000 points, which is the quantitative basis for the "breakthrough to 70,000 points before year-end" forecast.
Interest Rate Upside Risk is Controllable, But Beware "Bad Rates" Scenario
In mid to late May, Japanese long-term interest rates rose sharply, overvalued tech stocks were sold off, and Japanese stocks corrected briefly—but quickly stabilized and didn't evolve into sustained declines.
In the Japanese market, long-term rates and TOPIX P/E are positively correlated for many periods, which differs from the logic in the U.S. The reasons: Japan's market allocates more weight to value stocks than the U.S.; Japan's long-term rates are affected more by inflation expectations; and the Bank of Japan tends to be loose for long periods, so actual interest rates—even when rising—remain below potential growth rates.
The real risk to watch is "bad rate rises"—if concerns about fiscal deterioration intensify and long-term rates are driven up by actual rates, approaching or exceeding potential growth, valuation pressure will increase significantly. The most extreme scenario would be Japan's 10-year government bond yield breaking 3% due to actual interest rate increases. Currently, Japan's 10-year real interest rate is gradually rising to about 25 basis points, but this risk has not yet become a market mainline.
Main Trading Lines: Tech First, Lagging Sectors Await Catch-Up
With oil prices not falling quickly and inflation pressure persisting, the Japanese market is closer to a mild stagflation environment, and market preferences aren't entirely dependent on macro cycles, including theme stocks, restructuring stocks, and inflation beneficiaries.
Currently, buying is concentrated in tech stocks, but if Middle East uncertainties ease, capital may spread to previously lagging momentum sectors—including construction, real estate, financials, defense, and energy. Auto stocks are separately mentioned—previously underperformed due to bottlenecks, now have short-term rebound potential.
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