Bruce Kirk, chief Japan equity strategist at Goldman Sachs Japan, said that U.S. investors are returning to the Japanese stock market as their confidence recovers from the initial shock of the Middle East crisis. Kirk noted that the stabilization of the yen is partly driving this shift and has also spurred U.S. capital inflows into the tech-heavy Nikkei 225, as reflected in its divergence from the broader Topix index. He added that unhedged U.S. investors may be more willing to buy Japanese stocks, given that Japanese policymakers are unlikely to tolerate a sharp depreciation of the yen to near its current level of 160 to the dollar or below.
In an interview on April 20, Kirk stated that Japan’s current situation appears quite robust, and once the market shifts its focus from the short term to the medium term, buying interest will quickly pour in. Despite uncertainties in geopolitics and energy markets, the rebound in Japanese stocks has exceeded expectations, supported by structural advantages such as strategic petroleum reserves and a diversified supply of liquefied natural gas. The Nikkei 225 has risen about 16% so far this month, erasing its previous losses and surpassing gains of about 8% in both the Topix and the S&P 500.
Kirk said investors are increasingly convinced that the recent sell-off in Japanese stocks—during which the Nikkei 225 fell 13% in March—was driven by global rather than Japan-specific factors, giving them greater confidence to return to the market. Domestic tailwinds have also reinforced this view, with expectations that the upcoming earnings season, mid-term plan revisions, and annual general meetings will strengthen scrutiny of capital efficiency and balance sheet allocation. According to data from the Japan Exchange Group, North American investors were the only overseas group that were net buyers of Japanese stocks in March. Further support may come from policy changes, as the Financial Services Agency of Japan is expected to finalize new corporate governance guidelines by summer, which will increase pressure on companies to unwind cross-shareholdings, deploy excess cash, and improve returns.
Kirk said whether Japanese stocks can sustain a revaluation will depend on higher return on equity (ROE). While some major banks are targeting ROE of around 15%, about 44% of companies listed on the Topix still have ROE below 8%. Risks of further selling remain, especially if Middle East tensions escalate and hurt global economic growth.
