Goldman Sachs raises its 12-month TOPIX target to 4500, reflecting changes in yen exchange-rate assumptions

Overview

This is a Goldman Sachs weekly report on Japanese equities, with the core message being an upward revision to TOPIX target levels based on the FX team’s latest yen forecast. The report notes that a weaker yen-versus-dollar assumption will improve Japanese corporate earnings expectations and maintains a constructive medium-term view on the Japanese equity market.

Core views

The report’s core views include: first, TOPIX 3/6/12-month targets are raised to 4200/4300/4500; second, FY26-FY28 EPS is expected to grow by +13%/+11%/+9%, respectively; third, TOPIX valuation has recently remained in the 16-17x range and still has room for further upside; fourth, short-term market volatility may continue, but the quarterly earnings trend is expected to be positive; fifth, continued net buying by US investors may keep influencing Nikkei’s relative performance versus TOPIX.

Analysis framework

The report uses a top-down equity strategy framework, combining FX assumptions, EPS growth forecasts, index valuation ranges, fund flows, sector performance, and thematic basket performance to assess TOPIX target levels and potential upside over the next 3/6/12 months.

Methodology notes

• Equity strategyIndex target revision

  Adjusting EPS and index targets based on FX assumptions

  The report translates changes in USDJPY assumptions into FY26-FY28 EPS growth expectations and accordingly raises TOPIX 3/6/12-month targets.

• Market monitoringFund flow analysis

  Observing foreign investor buying and selling by region

  The report uses TSE and JPX fund flow data to compare the net buying and selling directions of North American, European, foreign, individual, and domestic institutional investors.

Asset mapping & comparison

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

• TOPIX

  Core covered index

  Strengths

  Target levels raised, EPS growth expectations improved, and valuation is in the 16-17x range with further upside potential.

  Weaknesses

  In the short term, it may be affected by market volatility, AI concerns, and geopolitical factors.

  Comparison

  The report mentions that net buying by US investors tends to drive Nikkei to outperform TOPIX on a relative basis.

  Risks

  FX assumptions fail to materialize, earnings miss expectations, or foreign capital flows reverse.

• Japanese equities

  Regional equity asset class

  Strengths

  Positive medium-term outlook, quarterly earnings trend expected to be favorable, and some regions of foreign investors still showing net buying.

  Weaknesses

  European investors were heavy net sellers in June, and short-term sentiment may face pressure.

  Comparison

  Relative to KOSPI and Nikkei, the report says TOPIX has pulled back less from its June high.

  Risks

  Declining global risk appetite, AI-theme volatility, and changes in the yen’s path.

Key data

• Current TOPIX level4011.31Disclosed on the report’s cover page.
• Current NK225 level64611.15Disclosed on the report’s cover page.
• New TOPIX 3/6/12-month targets4200/4300/4500Raised from the previous 4100/4200/4400.
• Implied upside+5%/+7%/+12%Corresponding to the 3/6/12-month targets.
• FY26/FY27/FY28 USDJPY assumptions162/160/155Revised from 157/154/150.
• FY26-FY28 TOPIX EPS growth expectations+13%/+11%/+9%Resulting from the FX assumption revisions.
• June net buying of Japanese equities by North American investorsabout ¥600 billionThe report says this was mainly driven by US investors.
• June net selling of Japanese equities by European investorsabout ¥1.5 trillionThe report believes European investors are more value-oriented.

Impact & implications

If the yen remains weak and the earnings trend materializes, TOPIX still has a medium-term basis for upside; however, short-term market sentiment may be affected by pullbacks in the AI theme, geopolitics, and volatility. At the sector level, the report notes Mining and Banks as top sectors, Air Transport and Services as bottom sectors, while also focusing on the performance of financials, energy, exporters, AI beneficiaries, and valuation-tiered baskets.

Risks

• AI-related concerns may affect short-term market sentiment.
• Geopolitical factors may suppress risk appetite.
• If the USDJPY path differs from assumptions, there is downside risk to EPS and index targets.
• A reversal in foreign capital flows may affect Japanese equity performance.

What to watch

• Whether TOPIX approaches its 3/6/12-month target path of 4200/4300/4500.
• Whether FY26-FY28 EPS growth reaches the expected +13%/+11%/+9%.
• Whether USDJPY moves close to the annual assumptions of 162/160/155.
• Whether quarterly earnings validate improving earnings trends.
• The net buying and selling direction of Japanese equities by North American and European investors.