Foreign inflows support Japanese stocks, while earnings season shows broader improvement but guidance remains cautious

Overview

This report is Goldman Sachs' Japan Weekly Kickstart, and its core discussion covers the recent regional sources of foreign net inflows into the Japanese equity market, FY3/26 fourth-quarter earnings season results, FY3/27 company guidance, sector performance, and changes in the correlation between rates and equities. The report shows that even after the fourth-quarter earnings season ended, foreign inflows remained strong, with all regions net buyers of Japanese equities in April and North America showing a notable pickup in buying momentum.

Core views

The report's core views are: first, foreign funding for Japanese equities remains supportive, with recent TSE data showing foreign investors and individual investors as net buyers, while domestic institutions were net sellers; second, the share of positive earnings surprises exceeded negative surprises, indicating improved earnings breadth, but large negative surprises in manufacturing and positive surprises in non-manufacturing and financials created a clear divergence; third, FY26 company guidance implies only 3% year-over-year net profit growth, well below the 9% consensus expectation, suggesting corporate management teams still face supply-chain and macro uncertainty; fourth, the 3-month rolling correlation between bond yields and Japanese equities has turned negative, and historically large yield swings have often coincided with negative equity returns, making rate volatility a key risk.

Analysis framework

The report combines TSE investor-type flow data, regional foreign net buying, TOPIX and Nikkei performance, the NT ratio, 10-year JGB yields, earnings surprise ratios, FY26 earnings contributions, company USDJPY assumptions, and a self-constructed liquidity stock basket for cross-sectional analysis. Its approach is a portfolio strategy framework, with the emphasis not on single-stock recommendations but on assessing how funding flows, earnings revisions, sector rotation, and macro rate shocks affect the Japanese equity market.

Methodology notes

• 资金流分析Tracking TSE investor-type flows and regional foreign net buying

  Use exchange flow data to observe whether foreign investors, individuals, and domestic institutions are net buyers or sellers of Japanese equities, and break foreign flows down by North America, Europe, Asia, and other regions.

  The report uses TSE data to show that all regions were net buyers of Japanese equities in April, and that North America's rolling 3-month net buying reached the highest level since May 2013.

• 业绩季分析Breaking down earnings surprises and FY26 guidance

  Compare the proportions of positive and negative earnings surprises, and examine each sector's contribution to net profit growth guidance.

  During the FY3/26 earnings season, 55% of companies reported positive surprises and 35% reported negative surprises; FY26 net profit growth guidance was 3%, with Electric Appliances & Precision Instruments expected to contribute more than half of the growth.

• 宏观风险分析JGB yield and equity correlation

  Track the 3-month rolling correlation between 10-year JGB yields and TOPIX, and assess the impact of large yield swings on equity returns.

  The report states that the correlation between Japanese bond yields and equities has turned negative, and that historically large yield moves often coincide with negative equity returns.

• 股票篮子方法Liquid Japanese equities equal-weight basket

  Use Japanese stocks with 6-month average daily trading value above US$20mn as the liquidity universe, and construct equal-weight sector, sub-sector, and thematic indices.

  As of December 17, 2025, the universe includes 271 stocks, and the indices are built based on MSCI sector definitions, quantitative metrics, and/or GS equity analyst views; the same stock may appear in multiple indices.

Asset mapping & comparison

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

• Japanese equities

  core research asset

  Strengths

  Strong foreign net inflows, with all regions net buyers in April; the FY3/26 positive earnings surprise ratio was higher than the negative surprise ratio.

  Weaknesses

  FY26 net profit growth guidance is only 3%, below the 9% consensus; supply-chain concerns remain.

  Comparison

  Nikkei outperformed TOPIX by about 2.4% over the past month, and the NT ratio remained above 16x.

  Risks

  Sharp swings in JGB yields, downward revisions to earnings guidance, and a slowdown in foreign inflows.

• TOPIX

  Japanese equity market benchmark

  Strengths

  It includes a broad set of Japanese listed companies and can reflect the overall trend of earnings season and sector rotation.

  Weaknesses

  It has recently lagged Nikkei and has been weighed down by negative surprises in manufacturing.

  Comparison

  In the report week, TOPIX was 3,892.46 and Nikkei was 63,339.07; Nikkei outperformed TOPIX over the past month.

  Risks

  Rising rates or large yield swings could pressure valuations, and net selling by domestic institutions could also create short-term pressure.

• Nikkei 225

  Reference for Japanese large-cap and exporter exposure

  Strengths

  It has recently outperformed TOPIX, and the NT ratio remains elevated.

  Weaknesses

  A high NT ratio may indicate crowded relative positioning or rising near-term valuation pressure.

  Comparison

  It has outperformed TOPIX by about 2.4% over the past month.

  Risks

  If the market rotates from growth and large caps to broader value or domestic-demand sectors, Nikkei's relative advantage could fade.

• JGB 10Y

  Macro variable for equity valuation and risk appetite

  Strengths

  As an interest-rate environment indicator, it helps assess valuation pressure on equities and changes in funding preference.

  Weaknesses

  Rapid yield swings are usually unfavorable for equity returns.

  Comparison

  The report says the 3-month rolling correlation between 10-year JGB yields and TOPIX has turned negative.

  Risks

  A sharp rise in yields or wider volatility could trigger a pullback in Japanese equities.

• USDJPY

  Corporate earnings assumption variable

  Strengths

  The yen exchange-rate assumption helps assess exporter earnings and the credibility of overall earnings guidance.

  Weaknesses

  FY26 company assumptions are concentrated around 151 to 152; any deviation in FX will affect earnings realization.

  Comparison

  The report shows the median FY26 company USDJPY assumption at 151.0 and the mean at 152.3, while GS FY25-FY27 assumptions are 151/154/148.

  Risks

  A significant yen appreciation could compress exporter margins, while a significant depreciation could affect costs and policy expectations.

Key data

• TOPIX3,892.46 (-0.7%)Major Japanese index performance listed in the report-week summary.
• NK22563,339.07 (+3.1%)Major Japanese index performance listed in the report-week summary.
• Nikkei relative to TOPIX over the past month+2.4%The report says Nikkei outperformed TOPIX by about 2.4% over the past month, and the NT ratio remained above 16x.
• FY3/26 positive/negative earnings surprise ratio55% / 35%Among TOPIX constituents with February/March fiscal year ends, the share of positive surprises was higher than the share of negative surprises.
• FY26 net profit growth guidance+3% yoyCompany guidance is below the consensus expectation of +9%.
• FY26 company USDJPY assumptionsmean 152.3, median 151.0Exchange-rate assumptions provided by companies with February/March fiscal year ends.
• TSE Prime cash equity net buying from May 11 to 15foreign investors approx. ¥534bn, individuals approx. ¥167bn, domestic institutions approx. -¥196bnForeign investors and individuals were net buyers, while domestic institutions were net sellers.
• Liquidity stock universe271 stocksJapanese stocks with 6-month average daily trading value above US$20mn, as of December 17, 2025.

Impact & implications

For investors, the main implication of the report is that Japanese equities remain supported in the short term by foreign inflows, relative Nikkei strength, and improving earnings surprise breadth; however, the gap between earnings growth guidance and consensus suggests that market expectations for FY26 earnings may still need to be revised down or further validated. If JGB yields continue to swing sharply, equity markets may face valuation pressure, especially in rate-sensitive or fully valued sectors.

Risks

• Sharp swings in JGB yields could lead to negative returns or valuation compression in Japanese equities.
• FY26 company net profit growth guidance is only 3%, below the 9% consensus, creating downside risk to earnings expectations.
• Large negative earnings surprises in manufacturing show that earnings improvement is not uniform.
• Supply-chain concerns remain and may affect the realization of FY3/27 earnings guidance.
• If foreign inflows slow or reverse, the recent funding support for Japanese equities could weaken.
• A meaningful gap between USDJPY assumptions and the actual exchange rate would affect corporate earnings and market expectations.

What to watch

• Whether net buying of Japanese equities by North American, European, and Asian investors continues.
• Whether Nikkei's strength versus TOPIX and the NT ratio continue to stay above 16x.
• Whether FY26 company earnings guidance is revised up toward consensus.
• Whether Electric Appliances & Precision Instruments delivers its expected contribution to FY26 net profit growth.
• Whether the 10-year JGB yield remains negatively correlated with TOPIX.
• Changes in buying and selling behavior by foreign investors, individuals, and domestic institutions in TSE Prime cash equities.
• The extent to which actual USDJPY moves deviate from company assumptions around 151 to 152.