According to Bruce Kirk, Chief Japan Equity Strategist at Goldman Sachs, the current exchange rate of around 157.13 yen to the dollar offers a "sweet spot" for overseas investors buying Japanese stocks. This exchange rate level not only reduces the risk of dollar value loss due to yen depreciation but also offers the potential to gain foreign exchange profits from possible future yen appreciation.
Exchange Rate as Key Attraction
Kirk notes that the likelihood of the yen dropping below 160 against the dollar is low, as such a situation could trigger intervention by the Japanese government. The current exchange rate makes Japanese stocks more attractive to foreign funds, allowing these investors to establish positions at a lower cost and minimize the risk of future losses due to exchange rate fluctuations.
“This presents a unique opportunity for foreign investors to not only gain returns from Japanese equities but also potentially profit from yen appreciation,” Kirk states.
Rebound in Appeal of Japanese Stocks
Although the Japanese stock market has recouped most of its losses since its plunge in August, many overseas funds remain on the sidelines. As investor interest gradually rekindles, this may provide new momentum for the TOPIX index to return to its peak by 2025.
Goldman Sachs has a 12-month target of 3,100 points for the TOPIX, which closed at 2,726.74 points on Monday. In comparison, UBS and JPMorgan have set targets of 2,900 points and 3,000 points for the index, respectively.
Kirk emphasizes, “After a period of turbulence, we are now starting to see renewed foreign interest in the Japanese market.”
US Market Resilience Diminished Foreign Interest
Kirk also points out that the resilience of the US stock market amid political uncertainties once dampened the motivation for overseas investors to return to Japan. However, as market conditions stabilize, a trend of renewed foreign attention to the Japanese stock market is emerging.
He notes that the return of foreign capital will play a crucial role in driving the Japanese stock market higher, providing long-term benefits to the Japanese equity market.
Overall, the current "sweet spot" of the yen is not only significant in attracting foreign capital but also instills greater confidence in the future performance of the Japanese stock market. The continued inflow of foreign funds may become a vital pillar for the Japanese market in the coming years.
