According to the chief Japanese equity strategist at Goldman Sachs Japan, U.S. investors are returning to the Japanese stock market as their confidence recovers from the initial shock of the Middle East crisis. Bruce Kirk stated that a stabilizing yen is partly driving this shift and has also stimulated U.S. capital inflows into the tech-heavy Nikkei 225, evident in its divergence from the TOPIX index. He added that, given Japanese policymakers are unlikely to tolerate a significant depreciation of the yen much beyond its current level near 160 yen to the dollar, unhedged U.S. investors may be more inclined to purchase Japanese stocks. "The situation in Japan looks quite solid at the moment," Kirk said in an April 20th interview. He noted that once the market's focus shifts from the short-term to the medium-term, "buying comes in quite quickly." Kirk stated that despite uncertainties in geopolitics and energy markets, the Japanese stock market's rebound has been faster than expected, with structural advantages such as strategic petroleum reserves and diversified LNG supplies underpinning its resilience. The Nikkei 225 has risen approximately 16% this month, erasing previous losses and outperforming the roughly 8% gains of both the TOPIX and the S&P 500 indexes. In early trading Wednesday, U.S. stock index futures rose after former U.S. President Donald Trump stated he would extend a ceasefire with Iran until negotiations conclude. At the time of writing, the Nikkei 225 was up 0.22%, while the TOPIX index was down 0.75%. Kirk mentioned that investors increasingly view the recent sell-off in Japanese stocks—which saw the Nikkei 225 fall 13% in March—as being driven by global factors rather than Japan-specific issues, giving them more confidence to re-enter the market. He added that domestic positive factors also reinforce this view, with the upcoming earnings season, revisions to mid-term plans, and annual general meetings expected to intensify scrutiny on capital efficiency and balance sheet allocation. According to data from Japan Exchange Group, North American investors were the only overseas group to be net buyers of Japanese stocks in March. Kirk further noted that policy changes could provide additional support, as Japan's Financial Services Agency is expected to finalize new corporate governance codes by summer, increasing pressure on companies to unwind cross-shareholdings, deploy excess cash, and improve returns. He stated that a sustained re-rating of Japanese stocks will depend on higher Return on Equity (ROE). While some major banks target an ROE around 15%, approximately 44% of TOPIX-listed companies still have an ROE below 8%, he added. Risks of further selling remain, particularly if Middle East tensions escalate and harm global economic growth. Kirk said Japan, being highly sensitive to global growth, could be at risk in such a scenario. Since the Iran conflict, his team has lowered its 12-month target for the TOPIX from 4300 to 4200 points. However, he stated, "That's not what people are pricing in right now. In that context, when foreign investors compare Japan to other developed markets, they find Japan actually has a lot of strengths."
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