Goldman Sachs has raised its target for the Topix index, betting that the yen's persistent depreciation will provide lasting support for Japanese corporate earnings, despite lingering risks of short-term volatility.

In a report dated July 24, Goldman Sachs lifted its 12-month target for the Topix to 4500 points from 4400, implying roughly 12% upside from last Friday's close of 4011.31. The bank also revised its 3-month and 6-month targets upward to 4200 and 4300, respectively. The core driver of this adjustment lies in the currency forecast—Goldman Sachs' foreign exchange team expects the dollar-yen pair to reach 165 over the next 12 months, with a weaker yen directly boosting earnings for exporters and multinational corporations.

Goldman Sachs projects Topix earnings per share will grow 13% to 228 yen in fiscal 2026, followed by increases of 11% and 9% in the subsequent two years. While uncertainties surrounding the global artificial intelligence outlook and geopolitical tensions could create short-term market volatility, the bank noted that the Topix has only retraced about 2% from its June record high, demonstrating notable relative resilience.

Currency expectations drive the target upgrade

The primary catalyst for this target revision is Goldman Sachs' latest view on the yen's trajectory. The bank's forex team forecasts the dollar-yen rate to reach 162 in three months, 163 in six months, and 165 in 12 months. Corresponding annual exchange rate assumptions have also been adjusted: fiscal 2026 at 162, fiscal 2027 at 160, and fiscal 2028 at 155.

A sustained weaker yen provides a direct earnings tailwind for Japanese exporters and multinational conglomerates. Based on this currency path, Goldman Sachs predicts Topix earnings per share will grow 13% to 228 yen in fiscal 2026, followed by 11% growth in fiscal 2027 and 9% growth in fiscal 2028, forming a clear upward earnings revision chain.

Goldman Sachs acknowledges that uncertainties around global AI demand and geopolitical frictions could weigh on market sentiment in the near term. However, the bank simultaneously points out that the Topix has only corrected about 2% from its June record high, significantly outperforming other markets in the Asia-Pacific region.

Current valuations have stabilized within a forward price-to-earnings ratio range of 16 to 17 times, and Goldman Sachs believes there is ample room for long-term expansion. This valuation level provides fundamental support for the target upgrade and is a key basis for the bank's maintained medium-term bullish stance.

Additionally, fund flows into Japanese equities show a clear regional divergence. Data from June indicates that North American investors, primarily from the US, were net buyers of Japanese stocks to the tune of 600 billion yen. In contrast, European investors, traditionally favoring value strategies, were net sellers of 1.5 trillion yen during the same period—a starkly opposite direction.

Latest exchange data from mid-July further shows that foreign investors were net sellers of cash equities by 286 billion yen, while domestic retail investors and local financial institutions net bought 407 billion yen and 64 billion yen, respectively, effectively absorbing the foreign selling pressure and highlighting the supporting role of domestic capital in the market.