Japan's Stock Market Vulnerable to Sudden Sell-Off: Goldman Sachs

Japanese stocks have recovered from last year's correction and are now vulnerable to a potential downturn. According to Goldman Sachs Research, foreign investors who fled Japanese shares during the summer of 2024 may have left the market exposed to a major correction.

The sharp sell-off in Japanese equities was triggered by foreign exchange volatility, with the yen surging against the dollar. The sudden strengthening of the currency caught investors off guard, leading them to re-assess their risk posture toward Japanese equities.

Goldman Sachs Research notes that while the macro backdrop is less supportive for a similar event this year, the equities positioning looks more vulnerable than it did two years ago. The researchers warn that a sudden double-digit sell-off or a re-assessment of Japan's attractiveness could lead to a rapid de-risking by foreign investors.

However, despite these concerns, Goldman Sachs Research remains bullish on Japanese stocks in the medium- and long-term. They cite strong earnings momentum, exposure to global artificial intelligence growth, and ongoing efforts to improve corporate governance as drivers of Japan's attractiveness.