Japan equities review for 1Q: resource and AI themes lead, while fund flows show renewed overseas allocation interest

Overview

This issue of JAPAN WEEKLY KICKSTART focuses on the mark-to-market performance of Japanese equities in 1Q 2026 and adds a bimonthly update on fund flows and positioning. The report shows that TOPIX delivered positive returns in the quarter but fell sharply from the late-February high by quarter-end; Middle East geopolitical tensions boosted resource-related stocks, while AI-related materials and electronic components also outperformed materially. The report also notes that if client sentiment continues to stabilize, market attention may shift back from short-term resource supply risks to ROE improvement, corporate governance reform, full-year earnings, and the June shareholder meeting season.

Core views

The key views are: first, the strongest themes in Japanese equities in 1Q 2026 were concentrated in the AI and resource chains, with Electronic Components up 38% qoq, Energy up 33% qoq, Shippers up 24% qoq, and Trading Companies up 22% qoq; second, System Integrators fell 26% qoq amid fears of AI disruption, showing clear divergence within the AI theme; third, North American funds flowed strongly into Japanese equities in February, consistent with the theme of geographic diversification outside the US, but Europe remained the largest regional net buyer of Japanese equities; fourth, recent foreign and individual investors were net sellers, while domestic institutions were net buyers, so the near-term fund-flow picture is not uniformly positive.

Analysis framework

The report uses a cross-sectional framework across sectors, subsectors, and thematic indices, covering a liquid Japanese equity universe and combining TSE fund-flow data, active-weight changes in MSCI EAFE benchmark funds, I/B/E/S, FactSet, and Goldman Sachs Global Investment Research data to track market performance, earnings revisions, valuation, and capital allocation on a weekly basis.

Methodology notes

• universe constructionJapan high-liquidity equity universe

  Japanese equities with 6-month average daily trading value above US$20mn

  The report defines its Japanese equity research universe as stocks with 6-month ADTV above US$20mn; as of December 17, 2025, there were 271 such stocks, mainly used to match institutional clients' liquidity constraints.

• index constructionEqual-weight sector, subsector, and thematic indices

  45 equal-weight indices

  The research team divides the universe into 45 equal-weight indices, covering MSCI-defined sectors and subsectors as well as cross-sector themes such as High Dividend Yield and Gaming; constituent selection is based on MSCI classification, quantitative metrics, and/or the views of Goldman Sachs single-stock analysts.

• performance analysisBest-Worst spread

  Performance gap between the best- and worst-performing constituents within an index

  The report tracks each index's average performance and the spread between the best and worst constituents within the index to measure intra-theme dispersion and volatility.

Asset mapping & comparison

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

• Japanese equity market

  core research object

  Strengths

  TOPIX delivered positive returns in 1Q, overseas active weights and North American inflows increased, and structural themes still have support.

  Weaknesses

  TOPIX has fallen 11% from the late-February high, and foreign investors and individual investors were net sellers in recent fund flows.

  Comparison

  Europe remains the largest regional net buyer of Japanese equities, while North American net inflows rose sharply in February.

  Risks

  Geopolitical tensions, resource supply, fund-flow reversals, and earnings misses.

• AI-related Japanese equities

  one of the leading themes

  Strengths

  Electronic Components rose 38% qoq in 1Q, and AI-related materials stocks helped drive the performance of the resource basket.

  Weaknesses

  The AI theme is highly bifurcated, with System Integrators falling 26% qoq on disruption concerns.

  Comparison

  Compared with traditional system integrators, electronic components and AI materials are more favored by the market.

  Risks

  Overly high expectations for AI investment, valuation pullbacks, and uncertainty around the path of technological substitution.

• Resource- and energy-related Japanese equities

  short-term strong theme

  Strengths

  Energy rose 33% qoq, GSJPCRTR gained 34% yoy, and trading companies performed strongly.

  Weaknesses

  Performance is driven by geopolitical and oil and gas supply shocks, and sustainability depends on external variables.

  Comparison

  Resource-related stocks significantly outperformed the overall market in the quarter.

  Risks

  Uncertainty over oil and gas supply through the Strait of Hormuz and a decline in risk premium after geopolitical tensions ease.

Key data

• TOPIX 1Q performance+2.6% qoqAt the end of 1Q 2026, TOPIX was still down 11% from the late-February high of 3,930.
• TOPIX and NK225 cover levelsTOPIX: 3,645.19 (-0.1%) / NK225: 53,123.49 (-0.5%)Market index levels shown on the report cover.
• GS JP Critical Resources Basket+34% yoyDriven by the strong performance of trading companies and AI-related materials stocks.
• Electronic Components+38% qoqOne of the best-performing subsectors/themes in the quarter.
• Energy+33% qoqSupported by resource and oil and gas supply concerns.
• Shippers+24% qoqRanked among the top performers in the quarter.
• Trading Companies+22% qoqRanked among the top performers in the quarter and helped drive the resource basket higher.
• System Integrators-26% qoqDeclined on concerns about AI disruption.
• TSE Prime fund flows for March 23 to 27foreign investors -¥1.5tn; individuals -¥4bn; domestic institutions +¥227bnThe latest TSE weekly data show net selling by foreign investors and individuals, and net buying by domestic institutions.
• Universe size271 stocksThe number of Japanese equities with 6-month ADTV above US$20mn as of December 17, 2025.

Impact & implications

The implication for Japanese equities is that the market is being driven in the near term by resource supply risks, the AI theme, and overseas capital reallocation. If geopolitical shocks ease and client sentiment remains stable, the market may once again focus on structural improvement themes, including ROE enhancement, corporate governance reform, full-year earnings releases, and the June shareholder meeting season. For portfolio allocation, AI and resource themes remain sources of relative returns, but AI disruption is pressuring sectors such as System Integrators, suggesting that investors need to distinguish between beneficiary chains and damaged chains.

Risks

• Middle East geopolitical tensions may cause volatility in oil and gas supply and risk appetite.
• Uncertainty over oil and gas transport through the Strait of Hormuz could continue to affect resource-related stocks.
• TOPIX has already fallen materially from the late-February high, indicating that near-term market volatility remains elevated.
• Foreign investors and individual investors have recently been net sellers, and the improvement in fund flows still needs to be confirmed over time.
• The AI theme may create greater dispersion within industries, with sectors such as System Integrators facing disruption risk.

What to watch

• Whether client sentiment continues to stabilize.
• Whether ROE improvement and corporate governance reform return to the market focus ahead of full-year earnings and the June shareholder meeting season.
• Changes in subsequent net inflows from North America and Europe into Japanese equities.
• Whether the active weight of Japanese equities in MSCI EAFE benchmark funds continues to rise.
• Whether the relative performance of resource and AI-related themes can be sustained.