"Betting on Yen Stabilization + War Impact Fading," U.S. Investors Return to Japanese Stock Market

U.S. investors are returning to the Japanese stock market.

On April 20, Bruce Kirk, Chief Japan Equity Strategist at Goldman Sachs Japan, stated that as the initial shocks of the Middle East situation are gradually fading, market confidence has recovered and North American funds have flowed back into Japanese equity assets.

In an interview on April 20, Kirk emphasized that the stabilization of the yen exchange rate is an important driver of this shift.

Boosted by inflows of U.S. dollar funds, the Nikkei 225 Index has risen by about 16% this month, not only recouping previous losses but also significantly outperforming the TOPIX's approximate 8% gain and the S&P 500’s performance over the same period.

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

According to Japan Exchange Group data, while overseas funds as a whole recorded net selling of Japanese stocks in March, North American investors were the only overseas group to maintain net buying, a trend that has continued during the current market rebound.

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

He believes that the speed of the rebound in Japanese stocks has exceeded expectations. Structural advantages such as ample strategic oil reserves and diversified liquefied natural gas sources give the Japanese economy strong resilience amid current geopolitical and energy market uncertainty. Kirk said:

Japan is actually in a fairly robust position. Once market focus shifts from the short term to the medium term, the influx of funds will be very, very fast.

Kirk pointed out that multiple domestic catalysts are strengthening the case for being long Japanese equities. The upcoming earnings season, revisions to medium-term strategic plans, and annual shareholder meetings are expected to bring greater scrutiny to capital efficiency and the use of balance sheets.

Policy measures are also providing support. The Japanese Financial Services Agency is expected to finalize a new corporate governance code before summer, further pressuring listed companies to unwind cross-shareholdings, release excess cash, and enhance shareholder returns.

However, Kirk also acknowledged that the continued revaluation of Japanese equities will ultimately depend on a substantial improvement in return on equity (ROE).

Although some major banks have set ROE targets at about 15%, about 44% of TOPIX component companies still have ROE below 8%, so structural improvement remains challenging.

Despite the improved market sentiment, Kirk warned that the risk of further corrections remains.

He cautioned that if the situation in the Middle East escalates again and drags down global economic growth, Japan, which is highly dependent on the global economic cycle, will face significant pressure.

The Goldman Sachs team has slightly lowered the 12-month target for the TOPIX from 4,300 points to 4,200 to reflect uncertainties brought on by the conflict with Iran. However, Kirk remains relatively optimistic about the overall outlook:

This is not the mainstream expectation in the current market.

He said:

When foreign investors make peer comparisons between Japan and other developed markets in the current environment, Japan actually has quite a few advantages.