Japanese equities remain attractive over the medium to long term, but crowded positioning in 2026 raises short-term drawdown risk
AI summary card
Japanese equities remain attractive over the medium to long term, but crowded positioning in 2026 raises short-term drawdown risk
Goldman Sachs believes the July-August 2024 Japan equity selloff was driven by the resonance between rapid yen appreciation and risk-seeking positioning, while the current macro environment is less supportive of a sharp yen rally; however, equity, foreign investor, hedge fund, and retail margin positions are more crowded, calling for a more FX-neutral allocation.
- From July 11 to August 5, 2024, TOPIX fell about 24% from peak to trough, while USDJPY dropped rapidly from around ¥162 to ¥143, with exporters and financials hit most clearly.
- Current short yen positioning is close to 2024 levels, but Goldman Sachs' G10 FX Strategy team expects USDJPY to stay stronger for longer, raising its 3-month, 6-month, and 12-month forecasts to 162, 163, and 165.
- Risks on the equity side are more pronounced: TOPIX and Nikkei are 37% and 53% above their July 11, 2024 levels, foreign net inflows are more than 20% above 2024, and margin financing buy balances are 35% higher than in 2024.
- GS Prime Services data show hedge funds' Japan gross and net exposure are at the 99th and 98th percentiles of the past five years, with high concentration in AI-related and FX-sensitive positions.
- The report recommends adopting a more FX-neutral stance when speculation about yen intervention or overseas capital repatriation intensifies, and monitoring baskets such as GSJPFXS1, GSJPFXW1, GSJPDOMS, and GSJPINTR.
Report interpretation
Overview
This report reviews the trigger chain behind the sharp July-August 2024 selloff in Japanese equities and compares the FX, foreign investor, hedge fund, retail margin, and thematic positioning at that time with the current 2026 environment. The core conclusion is that the current macro backdrop is less favorable for rapid yen appreciation than in 2024, and USDJPY may stay stronger for longer; however, positioning and thematic crowding in the Japanese equity market are higher, making drawdown vulnerability even greater if an unexpected source of volatility emerges.
Core views
Goldman Sachs remains constructive on Japanese equities over the medium to long term, citing strong earnings momentum, exposure to the global AI growth theme, a structurally weak yen, and corporate governance reforms driving ROE improvement. But short-term risks are concentrated in two areas: first, if policy intervention, pension repatriation, or macro data trigger a sharp yen rally, exporters and financials could lead broader market de-risking; second, if the AI theme or geopolitical shocks alter the global growth narrative, the currently highly crowded AI-related and FX-sensitive positions could amplify downside.
Analysis framework
The report combines historical event review with a comparison of current positioning: it first breaks down the transmission from USDJPY, TOPIX, sector performance, and portfolio P&L during the July-August 2024 selloff, then compares 2026 CFTC yen futures positioning, foreign net buying, GS Prime Services hedge fund exposure, TOPIX sector and single-stock concentration, margin financing buy balances, Nikkei volatility, and USDJPY implied volatility.
Methodology notes
Uses non-commercial investors' net short USDJPY futures positions to gauge short-term crowding in yen trades.
The report views this indicator as an important high-frequency tool for observing USDJPY positioning, but notes that it only covers the futures market and cannot fully capture longer-term, stickier yen carry trade positioning.
Uses cumulative net buying by foreign investors in Japanese cash equities and futures to measure the intensity of overseas investor allocation.
The report notes that foreign investors have net bought nearly ¥15tr since the April 2025 low, leaving current foreign net positioning more than 20% above July 2024 levels; if market attractiveness is reassessed, outflows could occur quickly.
The speed of yen moves matters more than the starting and ending levels.
The report argues that sudden and rapid yen appreciation can pressure exporters and trigger broader equity de-risking; if yen adjustment is gradual and well anticipated by the market, the impact on equities may be milder.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- TOPIXCore index and risk-bearing asset of the Japanese equity market
- Strengths
- Supported by earnings momentum, the AI theme, a weak yen, and corporate governance reforms, with the medium- to long-term outlook still positive.
- Weaknesses
- Price levels are significantly higher than in 2024, and foreign investor, hedge fund, and retail margin positions are all more crowded.
- Comparison
- In July-August 2024, it saw an about 24% peak-to-trough drawdown during the rapid decline in USDJPY; current price and positioning levels are both higher.
- Risks
- Sharp yen appreciation, reversal of the AI theme, geopolitical shocks, rapid foreign outflows.
- USDJPYAn important macro trigger variable for Japanese equity risk appetite and sector rotation
- Strengths
- The current macro backdrop—including higher U.S. yields for longer, concerns about Japan's fiscal sustainability, and a gradual BOJ hiking path—supports a stronger USDJPY.
- Weaknesses
- Speculative short yen positioning is already close to 2024 levels; if policy or data trigger a reversal trade, volatility could widen rapidly.
- Comparison
- In July 2024, it fell rapidly from around ¥162 to ¥143, triggering equity market de-risking; the 2026 forecasts are 162 in 3 months, 163 in 6 months, and 165 in 12 months.
- Risks
- Yen intervention, surprises in U.S. macro data, capital repatriation driven by rising JGB yields.
- GSJPFXS1Japanese equity basket benefiting from a stronger yen
- Strengths
- Composed of Japanese listed companies more positively correlated with yen appreciation, making it suitable for hedging the impact of rapid yen appreciation on Japanese equities.
- Weaknesses
- If the yen continues to weaken or exporters continue to lead, relative performance may lag.
- Comparison
- The report says it significantly outperformed TOPIX during the July-August 2024 correction.
- Risks
- Less-than-expected yen appreciation, insufficient domestic demand recovery, lagged basket rebalancing.
- GSJPFXW1Japanese equity basket benefiting from a weaker yen
- Strengths
- Suitable for equity investors seeking to benefit from yen depreciation; constituents have higher overseas revenue exposure and FX sensitivity.
- Weaknesses
- Highly sensitive to rapid yen appreciation and de-risking in exporters.
- Comparison
- The report says it underperformed TOPIX during the July-August 2024 correction.
- Risks
- Yen intervention, reversal in profit sensitivity, crowded-trade unwinds.
- GSJPDOMSJapanese domestic demand stock basket
- Strengths
- Mainly composed of domestically oriented Japanese companies, offering stronger relative defensiveness under yen appreciation shocks.
- Weaknesses
- If the market continues to favor exporters, AI, and global revenue exposure, it may relatively lag.
- Comparison
- The report says it significantly outperformed TOPIX during the July-August 2024 correction.
- Risks
- Weaker-than-expected domestic demand momentum in Japan, insufficient policy effectiveness.
- GSJPINTRJapanese international revenue exposure basket
- Strengths
- Benefits from overseas revenue and a weak yen environment.
- Weaknesses
- More sensitive to yen appreciation, exporter valuation compression, and changes in the global growth narrative.
- Comparison
- The report says it underperformed TOPIX during the July-August 2024 correction.
- Risks
- Reversal of the AI or global growth narrative, rapid yen appreciation, slowing overseas demand.
Key data
- 2024 TOPIX peak-to-trough drawdown-24%The period is from July 11 to August 5, 2024; the report believes part of it was triggered by the rapid decline in USDJPY.
- 2024 USDJPY moveabout ¥162 to ¥143During the same period, the yen appreciated rapidly, pushing up FX volatility and hitting risk-seeking positions in Japanese equities.
- Current TOPIX and Nikkei levels versus July 11, 2024TOPIX +37%, Nikkei +53%The significantly higher price levels make positioning and profit-taking risks more prominent.
- Foreign net positioningmore than 20% above July 2024Foreign net buying has reached nearly ¥15tr since the April 2025 low.
- Hedge fund Japan exposureGross exposure at the 99th percentile, net exposure at the 98th percentileBased on GS Prime Services' past five-year metrics, indicating Japan positioning is near historical highs.
- Margin financing buy balance35% above July 2024Mainly reflects leveraged positioning by Japanese retail investors, which may face liquidation pressure during pullbacks.
- USDJPY forecast3 months 162, 6 months 163, 12 months 165Goldman Sachs' G10 FX Strategy team raised its forecasts, believing the yen still faces depreciation pressure if the macro backdrop remains unchanged.
- Foreign selling in 2024-2025about -¥13trFrom July 2024 to April 2025, foreign investors were net sellers of Japanese cash equities and futures amid market volatility and Japanese political uncertainty.
Impact & implications
The investment implication is that Japanese equities have not lost their medium- to long-term allocation appeal, but now is not an appropriate time to continue betting on only yen weakness, AI, and exporters. For investors worried about rapid yen appreciation, the report recommends a more FX-neutral Japanese equity allocation, with a preference for strong-yen beneficiary baskets and domestic demand baskets; for investors who remain bearish on the yen, it suggests weak-yen and international revenue exposure baskets, while warning of crowded-trade reversals.
Risks
- The yen appreciates rapidly due to policy intervention, capital repatriation, or surprises in macro data.
- Momentum in AI-related stocks reverses, leading to de-risking in currently highly concentrated thematic positions.
- Geopolitical shocks weaken the U.S.-led global growth narrative.
- Foreign net positioning is high; if Japan's relative attractiveness is reassessed, outflows could accelerate.
- Hedge funds' Japan gross and net exposure are at extremely high percentiles over the past five years, making them vulnerable to risk limits and stop-loss mechanisms.
- Retail margin financing buy balances are near five-year highs and may amplify liquidation pressure during market pullbacks.
- Low USDJPY implied volatility suggests the market has not fully priced in the risk of sudden yen appreciation.
What to watch
- Whether USDJPY begins to decline rapidly rather than gradually.
- Policy signals from the Japanese government regarding yen intervention, overseas capital repatriation, or pension asset reallocation.
- Whether CFTC non-commercial investors' net short USDJPY futures positions move further toward or above 2024 levels.
- Whether hedge funds' Japan gross and net exposure in GS Prime Services data remain at extreme percentiles.
- Whether TOPIX sector performance continues to be driven by a small number of sectors such as AI-related names, exporters, and financials.
- Whether Nikkei volatility and USDJPY 1M ATM implied volatility rise simultaneously.
- Whether foreign flows in cash equities and futures shift from net buying to rapid net selling.