Goldman Sachs has increased its price target for the Tokyo Stock Price Index, betting that a persistently weaker yen will provide ongoing support for Japanese corporate earnings, despite lingering short-term volatility risks.

In a July 24 report, the bank raised its 12-month target for the index from 4,400 to 4,500 points, implying potential upside of roughly 12% from last Friday's closing level of 4,011.31. At the same time, it also lifted its three-month and six-month targets to 4,200 and 4,300 points, respectively. The core rationale for this adjustment lies in currency expectations—Goldman Sachs' foreign exchange team projects the dollar-yen rate will reach 165 over the next 12 months, with a weaker yen directly boosting earnings for exporters and multinational corporations. Goldman Sachs forecasts that the index's earnings per share will grow 13% to 228 yen in fiscal year 2026, followed by 11% and 9% growth in the subsequent two years. While uncertainties regarding the global artificial intelligence outlook and geopolitical tensions could cause market fluctuations in the near term, the bank noted that the index has only corrected about 2% from its June all-time high, demonstrating relative resilience.

Currency Expectations Drive Target Increase

The primary driver for this target revision is Goldman Sachs' latest assessment of the yen's trajectory. The bank's foreign exchange team expects the dollar-yen rate to reach 162 within three months, 163 within six months, and 165 within 12 months. Corresponding annual exchange rate assumptions have been adjusted accordingly: 162 for fiscal year 2026, 160 for fiscal year 2027, and 155 for fiscal year 2028. A persistently weaker yen provides a direct earnings tailwind for Japanese exporters and multinational corporate groups. Based on this currency path, Goldman Sachs predicts the index's earnings per share will grow 13% to 228 yen in fiscal year 2026, a further 11% in fiscal year 2027, and 9% in fiscal year 2028, forming a clear chain of upward earnings revisions. The bank acknowledges that uncertainties surrounding global AI demand and geopolitical frictions could pressure market sentiment in the short term. However, it also points out that the index has only corrected about 2% from its historical high in June, significantly outperforming other markets in the Asia-Pacific region. Current valuations have stabilized in the 16 to 17 times forward earnings range, and the bank sees ample room for long-term expansion. This valuation level provides fundamental support for the target increase and is a key reason for Goldman Sachs to maintain a bullish medium-term stance.

Additionally, capital flows into the Japanese stock market show a clear regional divergence. June data indicates that North American investors, mainly from the United States, were net buyers of Japanese stocks to the tune of 600 billion yen. In contrast, European investors, who traditionally favor value strategies, were net sellers of 1.5 trillion yen over the same period, with the two directions sharply opposite. Latest exchange data from mid-July further shows that foreign investors were net sellers of 286 billion yen in spot stocks, while domestic retail investors and local financial institutions were net buyers of 407 billion yen and 64 billion yen, respectively, effectively absorbing the foreign selling pressure and demonstrating the supportive role of domestic capital in the market.