Japan’s blistering stock market rally isn't over, Goldman Sachs says

• Japan's red-hot stock market rally isn't over, Goldman Sachs says.
• Prime Minister Takaichi's election win is boosting confidence in political stability and pro-growth policies.
• Foreign money is flowing back in, but global funds are still underweight Japan.

Japan's stock market has been on a red-hot rally after decades of lackluster performance — and Goldman Sachs says it's not done yet.

The country's benchmark Nikkei 225 index has been hitting record highs since 2024, gaining 52% over the past 12 months. Meanwhile, the broader Topix index is up 12% this year and 41% over the past 12 months.

"We believe that we're still very much in the upward phase of the current market cycle, and we think that market cycle started in the autumn of 2022," Bruce Kirk, Goldman's chief Japan equity strategist, said on the bank's "Exchanges" podcast published on Tuesday.

Japanese stocks have extended their gains this year following Prime Minister Sanae Takaichi's landslide election victory earlier this month, which investors see as reinforcing political stability and pro-growth policies.

However, the next stage may be more challenging. It hinges on whether Japan moves into what he calls the "delivery phase" — where policymakers and corporate Japan prove they can follow through on the expectations investors have built up.

"If that top-down pressure can align with what investors, both foreign and domestic, are trying to do from a bottom-up perspective in terms of engaging with management, then I think we could see a really interesting dynamic moving forward," Kirk said.

A recovery in foreign investment is another reason Goldman sees room for the rally to continue.

After a sharp 24% peak-to-trough correction in Topix following the massive sell-off of summer 2024 that spooked investors, a wave of foreign money is coming in again.

Recent data showed 1.8 trillion Japanese yen in net buying in the week before the election — the second-highest weekly total on record.

Still, foreign positioning is not stretched, Kirk said. Mutual funds remain underweight Japan, and foreign allocations are only back to levels seen at the start of 2012, when former Prime Minister Shinzo Abe's policy agenda of aggressive monetary easing, fiscal stimulus, and structural reforms first sparked meaningful gains in Japanese equities.

For the rally to be sustained, investors need proof of improving corporate profitability. Kirk said return on equity has flatlined around 9% to 10%, despite the market's sharp rise.

"I think the key to the next phase will be ROE improvement," Kirk said.