Goldman Sachs: Japanese stocks fell but did not "leave the table", may rise 17% in the next 12 months with domestic investors as the main force

Despite the aftershocks, Wall Street's major banks remain bullish on Japanese stocks: falling but not "out of the game".

Amid concerns of a US recession, Japanese stocks experienced the largest single-day drop in history, followed by a rebound of over 10% from the low point, creating an "epic" volatility.

Panic continues to test investors' patience, can Japanese stocks regain their momentum?

On August 11, Goldman Sachs strategists Bruce Kirk and Kazunori Tatebe released their latest research report, stating that there are signs of stabilization in Japanese stocks after the recent rebound, and the long-term prospects for Japanese stocks still look good. They expect the TOPIX index to rise to 2900 points in 12 months, which is still 16.8% higher than today's closing price, with an estimated cumulative growth rate of 27% over the next three years.

Considering the recent pullback, the report lowered the year-end target price for the TOPIX index from 2950 points to 2700 points, representing an 8.7% upside from today's closing price.

Arbitrage trading liquidation is almost over, domestic investors will become the main force

Goldman Sachs believes that although a full recovery of investor sentiment will take time, Japanese stocks are still supported by multiple positive factors.

Firstly, the report states that as the liquidation of yen arbitrage trades gradually subsides, its impact on the yen and Japanese stock trends is expected to weaken.

According to data from the CFTC (Commodity Futures Trading Commission) as of August 6, non-commercial investors' net short positions have dropped from a high of $15 billion in the recent past to $1 billion. The report indicates that this means that approximately 90% of yen arbitrage trades may have been closed out.

Secondly, the report points out that the dominance of Japanese stocks may return to domestic investors.

Specifically, as Japanese stocks have gradually risen since last year, there has been relatively more selling pressure from domestic companies - net sales of ¥84 trillion last year and net sales of ¥8 trillion so far this year - indicating that during the sharp decline in Japanese stocks, more companies may re-enter the market to buy at lower prices.

On the other hand, historical experiences from the 2008 financial crisis and the 2020 COVID-19 pandemic suggest that during market volatility, individual investors in the country also shift from net selling to small net buying.

Finally, the report finds that the number of stock buyback announcements made by Japanese companies from the beginning of the year has exceeded the total for the entire previous year, with many announcements made in the first half of the year. It is reasonable to speculate that these companies are still in the initial stages of their buyback plans and still have a large amount of liquidity.

Combined with the gradual release of dividends from Japanese corporate reforms, the report expects the strong momentum of Japanese companies repurchasing stocks to continue, providing further impetus for the rise of Japanese stocks