"Betting on yen stabilization and waning war impact, U.S. investors return to Japanese stock market"

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American investors are returning to the Japanese stock market.

On April 20, Bruce Kirk, Chief Japan Equity Strategist at Goldman Sachs Japan Co., stated that as the initial shock from the Middle East situation gradually dissipates and market confidence recovers, North American funds have flowed back into Japanese equity assets.

In an interview on April 20, Kirk pointed out that the stabilization of the yen exchange rate is an important factor driving this shift.

Boosted by inflows of U.S. capital, the Nikkei 225 Index has risen about 16% this month, not only erasing previous losses but also significantly outperforming the TOPIX’s roughly 8% gain and the S&P 500’s performance during the same period.

He added that, given that Japanese policymakers are unlikely to tolerate the yen falling below the current level of around 160 per U.S. dollar, the willingness of American investors to participate without hedging against exchange rate risk may further increase.

U.S. Funds Lead, Japanese Stocks’ Appeal Stands Out

According to data from Japan Exchange Group, amid net selling in Japanese stocks by overseas funds as a whole in March, North American investors were the only foreign group to maintain net buying, and this feature has continued during the current rebound.

Kirk noted that investors are increasingly inclined to attribute the Nikkei 225’s 13% drop in March to global factors rather than Japan’s own fundamentals, giving them more confidence as they re-enter the market.

He believes that the rebound in the Japanese stock market has exceeded expectations. Structural advantages such as sufficient strategic petroleum reserves and diversified sources of liquefied natural gas have granted Japan’s economy considerable resilience amid current geopolitical and energy market uncertainties. Kirk said:

Japan is actually in a rather robust position. Once the market’s focus shifts from the short term to the mid term, capital inflows will accelerate very, very quickly.

Domestic Catalysts Intensify, Corporate Governance Reform Accelerates

Kirk pointed out that multiple domestic catalysts are strengthening the logic of going long on Japanese stocks. The upcoming earnings season, revisions to mid-term strategic plans, and the annual shareholders' meetings are expected to intensify scrutiny of capital efficiency and balance sheet management.

Policy factors also provide support. Japan’s Financial Services Agency expects to finalize a new corporate governance code before this summer, further pressuring listed companies to unwind cross-shareholdings, release excess cash, and improve shareholder returns.

However, Kirk also frankly admitted that the continued repricing of Japanese stocks ultimately depends on a substantial increase in return on equity (ROE).

Although some large banks have set ROE targets at around 15%, about 44% of TOPIX constituent companies still have ROE below 8%, and the structural improvement task remains challenging.

Geopolitical Risks Remain, Goldman Sachs Slightly Lowers Target Price

Despite market sentiment warming, Kirk noted that the risk of further pullbacks still exists.

He warned that if the Middle East situation escalates again, dragging down global economic growth, Japan—which is highly dependent on the global economic cycle—would face significant pressure.

The Goldman Sachs team has slightly lowered its 12-month target for the TOPIX from 4,300 points to 4,200 points to reflect uncertainties arising from the Iran war. However, Kirk still holds a relatively optimistic view of the overall outlook:

This is not currently the mainstream market expectation.

He said:

When foreign investors compare Japan to other developed markets in the current environment, Japan actually possesses quite a few advantages.

Risk Warning and DisclaimerThe market has risks, and investment should be cautious. This article does not constitute personal investment advice and has not taken into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are appropriate to their particular situation. Investing accordingly is at your own risk. ```