Japanese equities remain attractive over the medium to long term, but elevated positioning increases short-term drawdown risk
AI summary card
Japanese equities remain attractive over the medium to long term, but elevated positioning increases short-term drawdown risk
Goldman Sachs believes that in 2026 the yen and positioning in Japanese equities have approached or exceeded pre-sell-off 2024 levels, but the macro backdrop is more supportive of USDJPY remaining elevated, making a gradual profit-taking process more likely; if the yen unexpectedly appreciates rapidly, AI momentum reverses, or a geopolitical shock emerges, it could trigger a rapid de-risking similar to 2024.
- From July 11 to August 5, 2024, TOPIX experienced an approximately -24% peak-to-trough drawdown, partly triggered by USDJPY falling rapidly from around 162 to 143.
- Current TOPIX and Nikkei levels are about 37% and 53% above July 11, 2024, respectively, with foreign investors, retail margin accounts, and hedge fund Japan exposure all having risen materially.
- GS Prime Services data show Japan gross exposure and net exposure at the 99th and 98th percentiles, respectively, over the past five years, indicating highly crowded positioning.
- The GS G10 FX Strategy team raised its 3M, 6M, and 12M USDJPY forecasts to 162, 163, and 165, respectively, believing high US yields, Japanese fiscal concerns, and gradual BoJ hikes support continued yen weakness.
- The report recommends adopting a more FX-neutral Japanese equity allocation when speculation about yen intervention or capital repatriation intensifies, and monitoring baskets such as GSJPFXS1 and GSJPDOMS.
Report interpretation
Overview
This report reviews the trigger chain behind the sharp sell-off in Japanese equities from July to August 2024 and compares the FX and equity positioning environment at that time with the current state in 2026. The core conclusion is that the macro backdrop in 2026 does not fully replicate 2024, so the probability of a rapid yen appreciation may be lower; however, positioning in the Japanese equity market, foreign inflows, margin buying, and AI-related crowding are all higher, making the market more sensitive to rapid de-risking if an unexpected source of volatility emerges.
Core views
The report maintains a constructive medium- to long-term view on Japanese equities for reasons including strong earnings momentum, meaningful exposure to the global AI growth theme, structurally weaker yen, and corporate governance reform driving index-level ROE improvement. In the short term, however, market bets are relatively concentrated on yen weakness, financials and exporters, and AI-related stocks. If the yen appreciates rapidly due to policy intervention, capital repatriation, or macro data surprises, exporters and financials may come under pressure and trigger broader position unwinds. The report believes that under the current backdrop, gradual profit-taking is more likely than an immediate repeat of the collective exit seen in 2024; however, a challenged AI narrative or geopolitical shock could become new triggers.
Analysis framework
The report uses a combination of historical event review and current positioning comparison: it first breaks down the TOPIX drawdown from July to August 2024, the rapid decline in USDJPY, sector divergence, and the process of risk-limit triggers, then assesses current vulnerability using indicators such as CFTC speculative yen futures positioning, foreign net inflows into cash equities and futures, GS Prime Services hedge fund exposure, TOPIX and Nikkei price performance, margin buying balances, Nikkei volatility, and USDJPY 1M ATM implied volatility. It then combines this with the GS G10 FX Strategy team's yen outlook to propose allocation ideas across yen appreciation, yen depreciation, domestic-demand, and international equity baskets.
Methodology notes
Compare FX, sector, and flow characteristics during the historical peak-to-trough drawdown with current indicators item by item.
This framework is used to judge whether current conditions resemble the triggers from July to August 2024 and to distinguish macro trigger probability from equity market positioning vulnerability.
Measure short-term crowding in yen trades using speculators' net short positions in USDJPY futures.
The report notes that this indicator is close to but has not yet fully reached pre-July 2024 levels, while also not capturing longer-term, stickier yen carry-trade positioning.
Observe de-risking pressure in the equity market through foreign investors, hedge funds, and Japanese retail margin accounts.
Current foreign net positioning is above pre-July 2024 levels, hedge fund Japan gross and net exposure are at high percentiles, and margin buying balances are near five-year highs, suggesting unwind pressure could be amplified during drawdowns.
Express different yen and geographic revenue exposures through GSJPFXS1, GSJPFXW1, GSJPDOMS, and GSJPINTR.
The report uses these baskets to help investors adjust Japanese equity exposure under scenarios of rapid yen appreciation, continued yen depreciation, improving domestic demand, or accelerating global growth.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- TOPIXCore market index and risk vehicle
- Strengths
- Supported in the medium to long term by earnings momentum, AI growth exposure, structurally weaker yen, and corporate governance reform.
- Weaknesses
- The index has already risen significantly versus July 2024, with high participation from foreign and leveraged capital.
- Comparison
- From July to August 2024, it experienced an approximately -24% peak-to-trough drawdown due to the rapid decline in USDJPY and a reversal in risk appetite.
- Risks
- Rapid yen appreciation, foreign outflows, reversal in AI-related stock momentum, and geopolitical shocks.
- NikkeiJapanese equity index more significantly influenced by exporters and AI/TMT weights
- Strengths
- Up about 53% versus July 2024, driven by AI-related stocks and exporters.
- Weaknesses
- The rally is highly concentrated, and the NT ratio once expanded to 18x, pointing to crowded-trade risk.
- Comparison
- Has outperformed TOPIX and may be more sensitive to exporters, TMT, and yen direction.
- Risks
- AI valuation derating and yen appreciation compressing exporters' earnings expectations.
- USDJPYKey macro variable for risk appetite in Japanese equities
- Strengths
- GS G10 FX Strategy believes elevated US yields, Japanese fiscal concerns, and gradual BoJ hikes support further upside in USDJPY.
- Weaknesses
- Speculative yen shorts are close to 2024 levels, so if policy or data surprises reverse the trend, short covering could accelerate.
- Comparison
- From July to August 2024, USDJPY fell rapidly from around 162 to 143, one of the key triggers of the equity sell-off.
- Risks
- Japanese intervention, repatriation by pensions or savings capital, weaker US data, and a hawkish BoJ surprise.
- GSJPFXS1Basket benefiting from yen appreciation
- Strengths
- Consists of 44 Japanese listed companies linked to FX moves, suitable for expressing exposure that benefits from yen appreciation.
- Weaknesses
- If the yen continues to weaken or exporters continue to outperform, relative performance versus TOPIX may be constrained.
- Comparison
- The report says this basket significantly outperformed TOPIX during the July-August 2024 drawdown.
- Risks
- Less-than-expected yen appreciation and insufficient recovery in domestic-demand earnings.
- GSJPFXW1Basket benefiting from yen depreciation
- Strengths
- Consists of 38 Japanese listed companies linked to FX moves, with high overseas revenue and FX sensitivity, suitable for expressing a continued yen depreciation scenario.
- Weaknesses
- Sensitive to rapid yen appreciation and exporter unwinds.
- Comparison
- The report says this basket underperformed TOPIX during the July-August 2024 drawdown.
- Risks
- Yen intervention, US dollar weakness, and downward revisions to exporters' earnings expectations.
- GSJPDOMSJapanese domestic-demand equity basket
- Strengths
- Consists of 39 Japanese listed companies focused on domestic-demand operations and benefiting from improving domestic economic momentum.
- Weaknesses
- May lag if global growth and exporters continue to dominate the market.
- Comparison
- The report says this basket significantly outperformed TOPIX during the July-August 2024 drawdown.
- Risks
- Japanese domestic-demand recovery falling short of expectations and weakness in real wages or consumption.
- GSJPINTRJapanese international revenue equity basket
- Strengths
- Consists of 40 globally operating Japanese listed companies with a high share of overseas profits, suitable for a scenario of accelerating global economic momentum.
- Weaknesses
- Sensitive to yen appreciation and a decline in global risk appetite.
- Comparison
- The report says this basket underperformed TOPIX during the July-August 2024 drawdown.
- Risks
- Global growth slowdown, rapid yen appreciation, and downward revisions to export and overseas profit expectations.
Key data
- 2024 TOPIX peak-to-trough drawdownApproximately -24%Occurred from July 11 to August 5, 2024, partly triggered by the rapid decline in USDJPY.
- 2024 USDJPY moveFrom about 162 down to 143Rapid yen appreciation drove FX volatility and hit risk appetite for Japanese equities.
- Current TOPIX vs. July 11, 2024+37%The index level is significantly above its pre-sell-off 2024 level.
- Current Nikkei vs. July 11, 2024+53%The gain exceeds that of TOPIX, reflecting a larger contribution from exporters and AI-related stocks.
- Foreign net positioningMore than about 20% above pre-July 2024 levelsNet buying has approached JPY 15 trillion since the April 2025 low.
- Margin buying balanceAbout 35% above July 2024Primarily reflects leveraged exposure of Japanese retail investors and could face liquidation pressure during drawdowns.
- GS Prime Services Japan gross exposure99th percentile over the past 5 yearsShows hedge fund allocation to Japan is very high.
- GS Prime Services Japan net exposure98th percentile over the past 5 yearsNet long positioning is also at an extremely high level.
- GS G10 FX Strategy USDJPY forecast3M 162, 6M 163, 12M 165Raised from 160, 158, and 155 previously, reflecting a view of continued yen weakness.
- International equity basket sample40 Japanese listed companiesGSJPINTR consists of Japanese listed companies with a high share of overseas profits and global operations.
Impact & implications
For portfolios, the report's main implication is not simply to turn bearish on Japanese equities, but to reduce one-way FX and crowded-theme risks while maintaining medium- to long-term Japanese equity exposure. If the yen only strengthens gradually or capital repatriation is fully anticipated, the equity market impact may be relatively mild; but if volatility is triggered simultaneously by FX, AI, or geopolitics, crowded longs in financials, exporters, and AI-related stocks may be forced to de-risk rapidly. Investors can hedge with baskets that benefit from yen appreciation and with domestic-demand baskets, or allocate to yen-depreciation beneficiaries or international revenue baskets depending on their view of continued yen weakness and global growth.
Risks
- Rapid yen appreciation due to policy intervention, capital repatriation, or macro data surprises.
- Reversal in momentum or valuation derating of AI-related stocks, hitting the highly concentrated market leadership.
- Geopolitical shocks weakening the US-led global growth narrative.
- Foreign net positioning and hedge fund exposure are elevated and could exit quickly during drawdowns.
- Japanese retail margin buying balances are high and could trigger liquidation pressure when the market falls.
- Crowded longs in financials and exporters relative to defensives and domestic-demand sectors could intensify sector rotation.
- Concerns over Japanese fiscal sustainability and rising JGB yields could alter expectations for capital repatriation.
What to watch
- The speed of changes in USDJPY, not just the starting and ending levels.
- Whether CFTC non-commercial net shorts in USDJPY futures approach or exceed July 2024 levels.
- Whether GS Prime Services Japan gross and net exposure fall back from high percentiles.
- Whether foreign net inflows into cash equities and futures reverse rapidly.
- Whether Japanese margin buying balances and retail leverage continue to approach five-year highs.
- Whether the Nikkei Volatility Index and USDJPY 1M ATM implied volatility rise simultaneously.
- Whether the valuation premium of AI-related stocks versus non-AI stocks and the breadth of TOPIX gains deteriorate.
- BoJ policy, US inflation and employment data, Japanese fiscal policy, and potential yen intervention signals.