Key Takeaways:
Two of Wall Street's largest banks now see Japanese equities climbing more than 10% from current levels, driven by earnings growth and record shareholder returns.
Goldman Sachs and Citigroup raised their targets for Japanese stocks, forecasting the Topix index could climb more than 10% on earnings momentum and record buybacks.
"With the environment for foreign flows and earnings revisions now looking far more constructive, this 17.5x multiple should be seen as a reasonable target level," Goldman strategists Bruce Kirk and Julius Chan wrote in a note.
Goldman raised its 12-month Topix target to 4,400 from 4,200, implying about 11% upside. The bank lifted its fiscal 2026 earnings-per-share growth estimate to 11% from 7% and added a fiscal 2028 forecast of 9% growth. Citigroup set a Topix target of 4,500 and estimated the Nikkei 225 could reach 72,000, predicting it would break 70,000 by year-end.
Foreign investors have poured about 16 trillion yen ($100.3 billion) into Japanese equities since April, Goldman data show. Total shareholder returns by Topix companies reached 43 trillion yen in fiscal 2025, with buyback announcements remaining robust during the latest earnings season.
The coordinated bullish calls from two of the largest Wall Street banks signal a structural shift in how global money managers view Japanese equities. Both firms cited improving corporate profitability, rising shareholder returns and renewed foreign inflows as reasons for further gains.
Goldman revised its earnings estimates after what it called a positive full-year results season. The bank now expects three consecutive years of earnings expansion, with cumulative growth of about 33% through fiscal 2028. Citigroup's analysis pointed to Japanese companies' improving ability to pass on costs, which it said creates room for margin expansion even if initial profit guidance appears conservative.
Valuation also supports the bullish case, according to both banks. The Topix's forward price-to-earnings multiple retreated to about 15 times after geopolitical tensions in the Middle East triggered a selloff earlier this year, well below Goldman's 17.5 times target. Citigroup noted the Topix currently trades at 16.8 times forward earnings, a level it said is justified if return on equity continues rising toward 11% to 12%.
Citigroup identified potential sector rotation as a secondary catalyst. While current buying is concentrated in technology stocks, the bank said money could rotate into lagging sectors including construction, real estate, financials, defense, energy and autos if Middle East tensions ease.
The upgrades suggest Japan's equity market is undergoing a structural re-rating rather than a temporary rally. Investors will watch whether foreign inflows sustain their pace and whether corporate earnings guidance catches up to the optimistic forecasts from both banks.
This article is for informational purposes only and does not constitute investment advice.
