Japanese equity indexes have recovered from the 2024 correction and are well above where they were before the sell-off. Foreign investors who fled have returned and now hold larger positions in Japanese shares. This may have left Japan’s stock market vulnerable, Bruce Kirk, chief Japan equity strategist, writes in a report.
The rapid selloff in Japanese shares during the summer of 2024 was triggered by foreign exchange volatility, according to Goldman Sachs Research. The yen strengthened abruptly, with the dollar losing close to 11% against the yen in that period. The stock market dropped as investors re-assessed their risk posture toward Japanese equities, with export-oriented and financial stocks falling particularly hard.
“The macro backdrop looks less yen-supportive now versus 2024,” Kirk and his team write, suggesting that a sudden strengthening of the currency, as occurred in 2024, is less likely. “But the equities positioning looks more vulnerable to a major correction versus two years ago.”
Weighing the comparisons to July 2024
Money was flowing into Japanese equity markets in 2023 and the first half of 2024. During that time, foreign investors increased their equities positions by a net ¥8.4 trillion ($53 billion), according to data from the Tokyo Stock Exchange operator that counts both cash and futures. In the volatility that followed, flows reversed direction, and from July 2024 to April 2025, investors were net sellers of almost ¥13 trillion in Japanese equities.
More recently, from the bottom in April 2025, around the time President Donald Trump announced his global tariffs, there has been almost ¥15 trillion in net foreign purchases of Japanese equities. That leaves foreign investors’ positions some 20% higher than they were in 2024, before the sharp correction.
“A sudden double-digit sell-off in the equities market, or a re-assessment of the relative attractiveness of Japan versus other developed markets, could cause a lot of this elevated net foreign positioning to move elsewhere at speed,” Kirk writes.
Hedge fund investors have also favored Japanese shares. Their gross and net allocations to Japan as a percentage of their total positions are currently in the 99th and 98th percentiles respectively, according to data from Goldman Sachs Prime Services covering the past five years. These positions too might be “vulnerable to a rapid de-risking,” Kirk writes.
What is the outlook for Japanese stocks?
Even with concerns about potential near-term volatility, Kirk says there may be investment opportunities among Japanese equities over the medium- and long-term. Goldman Sachs Research recently raised its forecast target for the TOPIX index to 4,500 over the next 12 months (up from the previous forecast of 4,400, and compared with the index level of 3,960 on August 3).
Among the arguments favoring Japanese stocks are strong earnings momentum and meaningful exposure to global artificial intelligence (AI)-related growth. The researchers also cite ongoing efforts to improve corporate governance and investor returns among Japanese companies. These and other drivers “make Japan an extremely attractive equities market,” Kirk writes.
A “structurally weak yen” is also supportive for Japanese shares because it helps exporters’ profits. Goldman Sachs Research’s foreign-exchange strategy team recently raised its forecast for the dollar against the yen, arguing that US yields may remain higher for longer. They also cite lingering concern about fiscal sustainability in Japan and expectations that the Bank of Japan will raise rates only gradually.
Japan’s finance ministry and the US Treasury have recently intervened in the yen market to support the Japanese currency. The coordinated action may raise concerns about the potential for a repeat of 2024. But Kirk finds that “the macro backdrop is now significantly different to the previous correction.”
How yen movements may impact Japan’s markets
The sudden rise in the yen in July 2024 was caused by a nearly unique combination of events, according to Goldman Sachs Research. Japanese intervention to support the yen, an unexpected Bank of Japan rate hike, and surprising US macro data showing weaker inflation and weak payroll numbers all came at pretty much the same time.
Today, foreign-exchange and equity markets are positioned for a weaker yen, Kirk writes. This suggests that even if a decline in the currency were to accelerate, it would be unlikely to destabilize markets and trigger a rush for the exit. This lowers the likelihood of a rapid shift in the currency or equity markets that could lead to something like the 2024 episode, he notes.
Kirk warns, however, that “an increase in volatility from an unexpected source” might trigger a selloff, given investor positioning in the Japanese equity market. Possibilities include an event that challenges the narrative about the economic viability of AI globally—something akin to how investors reacted to advances in Chinese AI in 2025. A geopolitical shock that impacts global growth expectations might be another potential trigger.
Strategies for volatility in the yen and Japanese equities
For investors concerned about a rapid yen strengthening that might destabilize markets, Kirk and his team suggest a basket of stocks that earn all or most of their revenue from sales within Japan and are less tightly linked to currency markets.
The opposite is also possible for those who want to be positioned for further yen weakening—a focus on international companies that make at least half of their revenue outside Japan and tend to outperform when global economic momentum is accelerating, Kirk writes.
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