Japan 4Q Earnings Season: Positive Surprises Outweigh Negatives, Factory Automation Leads Gains

Overview

This report is Goldman Sachs' weekly Japan strategy outlook, focusing on the disclosure of Japanese corporate earnings for the 2026 fiscal year fourth quarter (as of April 30). The key takeaway is that the earnings season overall showed resilience, with positive surprises outweighing negative ones, high corporate guidance disclosure rates maintained, and positive share buyback trends. At the sector level, factory automation performed best due to strong U.S. orders, while system integrators underperformed due to some companies missing earnings expectations. In terms of capital flows, foreign investors and retail investors were net buyers, while domestic institutions were net sellers.

Core views

Earnings Disclosure Progress and Surprise Ratios: As of April 30, 28% of TOPIX constituents by market capitalization with fiscal years ending in February-March have reported fourth-quarter earnings. Among these, 54% were positive surprises, exceeding 36% negative surprises, indicating overall earnings performance better than market expectations. By type, manufacturers had 55% positive surprises, non-manufacturers 53%, and financials 40%, with manufacturers and non-manufacturers performing relatively better. High Earnings Guidance Disclosure Rates Maintained: 87% of reported companies disclosed first fiscal year profit guidance, significantly higher than the 42% level post-pandemic in 2020, showing corporate resilience to economic uncertainty without significant reduction in guidance disclosure due to macro concerns. Compared to historical averages, corporate guidance does not appear overly conservative (-8.0% vs. 10-year median of -8.1%). Significant Sector Divergence: The best-performing thematic index last week was factory automation (up 11% weekly), with Keyence and Fanuc reporting strong earnings due to healthy U.S. order growth. In contrast, the system integrator index fell 12% weekly, dragged down by Fujitsu (down 17% weekly) and NRI (down 18% weekly) missing earnings expectations. Other strong performers included trading companies, construction, machinery, and large banks. Positive Share Buyback Trends: By end-April, announced share buybacks totaled ¥11 trillion, though this includes ¥5 trillion related to Toyota Industries' tender offer. Overall, the buyback trend reflects corporate emphasis on shareholder returns.

Analysis framework

Goldman Sachs employs a top-down earnings tracking method, monitoring TOPIX constituents' earnings disclosure progress and surprise ratios by market capitalization weight, comparing them with historical data. The report assesses the stability of Japanese corporate guidance policies by comparing the current earnings season with past periods of economic uncertainty (e.g., during the pandemic). At the sector level, the report constructs 45 equal-weighted thematic indices (based on MSCI industry definitions and quantitative factors) to track performance and the spread between best and worst performers within each index, helping identify structural opportunities. Capital flow analysis uses Tokyo Stock Exchange data on investor type transactions to distinguish net buying/selling by foreign, retail, and domestic institutional investors, aiding in gauging market sentiment and capital preferences.

Methodology notes

• Industry/Sector Analysis FrameworkSupply-demand framework

  Earnings Surprise Ratio Analysis

  By tracking the ratio of positive to negative earnings surprises, the overall health of the earnings season can be assessed. Positive surprises exceeding 50% typically indicate overall corporate earnings exceeding expectations, signaling positive market sentiment.

• Corporate Fundamentals & Financial FrameworkEarnings Quality Analysis

  Earnings Guidance Disclosure Rate Tracking

  Tracking the proportion of companies disclosing earnings guidance reflects corporate confidence in the future. High disclosure rates suggest confidence in earnings predictability, while significant declines may signal increased uncertainty.

• Valuation methodsPE/PEG valuation

  Forward P/E vs. Historical Average Comparison

  Comparing the current TOPIX forward P/E with historical averages and standard deviations assesses valuation levels. A 16.0x P/E, 1.3 standard deviations above the mean, indicates elevated valuation levels.

• Quantitative/Factor/Portfolio TheoryStyle factor analysis

  Equal-Weighted Thematic Index Construction

  Constructing equal-weighted thematic indices avoids dominance by large-cap stocks, more evenly reflecting overall sector performance and facilitating identification of structural opportunities.

• Quantitative/Factor/Portfolio TheoryCapital Flow/Position Analysis

  Investor Type Capital Flow Tracking

  Tracking net buying/selling by investor type (foreign, retail, domestic institutions, etc.) helps gauge market attitudes and potential capital support or pressure.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Keyence

  Beneficiary: Factory automation sector leader, strong U.S. orders driving earnings

  Strengths

  Healthy U.S. order growth, strong earnings performance

  Comparison

  Leading gains with other factory automation sector companies

• Fanuc

  Beneficiary: Core factory automation sector company, strong U.S. orders

  Strengths

  Healthy U.S. order growth, strong earnings performance

  Comparison

  Jointly drove factory automation index's 11% weekly gain with Keyence

• Fujitsu

  Underperformer: System integrator missed earnings expectations, down 17% weekly

  Weaknesses

  Disappointing earnings

  Comparison

  Jointly dragged system integrator index down 12% weekly with NRI

  Risks

  Risk of continued earnings misses

• NRI

  Underperformer: System integrator missed earnings expectations, down 18% weekly

  Weaknesses

  Disappointing earnings

  Comparison

  Jointly dragged system integrator index down with Fujitsu

  Risks

  Risk of continued earnings misses

Key data

• TOPIX Constituents Reporting 4Q Earnings28%By market capitalization, as of April 30
• Positive Surprise Ratio54%Exceeding 36% negative surprises
• Companies Disclosing FY1 Profit Guidance87%Significantly higher than 42% post-pandemic in 2020
• Factory Automation Index Weekly Gain+11%Best-performing thematic index last week
• System Integrator Index Weekly Decline-12%Worst-performing thematic index last week
• Announced Share Buyback Total¥11 trillionAs of end-April, including ¥5 trillion related to Toyota Industries' TOB
• Foreign Investors Weekly Net Buying¥826 billionWeek of April 20-24, TSE Prime cash equities
• Domestic Institutions Weekly Net Selling¥89 billionWeek of April 20-24
• TOPIX Forward P/E16.0x1.3 standard deviations above historical average
• TOPIX Index3,728.73Up 0.3% weekly

Impact & implications

For Japanese equities overall, a resilient earnings season, high guidance disclosure rates, and positive buyback trends collectively support market sentiment. The strong performance of factory automation reflects the positive impact of U.S. reindustrialization themes on related Japanese companies, while system integrators' weakness suggests potential pressure in some IT services sectors. Continued net buying by foreign investors shows sustained interest in Japanese equities, but net selling by domestic institutions may reflect profit-taking or allocation adjustments by local investors. Valuationally, TOPIX forward P/E is at historically elevated levels, warranting investor attention to whether future earnings can support current valuations.

Risks

• Geopolitical and supply chain concerns may impact corporate guidance
• TOPIX valuations at historically elevated levels (1.3 standard deviations above mean)
• Potential spread of earnings misses among some system integrators

What to watch

• Remaining TOPIX constituents' 4Q earnings disclosure progress and surprise ratio changes
• Sustainability of U.S. order growth in factory automation sector
• Subsequent changes in foreign and domestic capital flows
• Differences between announced and actual share buyback execution