“ROE Hits Record 12.1%, Yet” Overseas Investors Leave Japan’s Stock Market

【Financial News Tokyo = Hye-jin Seo, Correspondent】Japan’s return on equity (ROE) has surged to a record 12.1%, but global investors are instead turning away from the Japanese stock market, Nihon Keizai Shimbun (Nikkei) reported on the 10th. The shift reflects growing doubts that the strong performance represents a “one-off boom” driven by exchange rates, tariff refunds, and inventory valuation gains, even though companies reported better-than-expected results.
According to Nikkei, the annualized ROE of Japanese companies with fiscal years ending in February or March reached a record 12.1% in the April-June quarter, based on figures compiled by Nomura Securities. Financial and utility companies were excluded.
However, overseas investors’ trading in Japanese stocks stagnated after peaking in the April-June period. A relative indicator comparing the Nikkei 225 Stock Average with major U.S. and European stock indexes has also been declining.
UBS continues to recommend an “overweight” position in Japanese equities, but attention at global investment conferences is shifting from Japan to Europe.
Daiki Aoki, chief investment officer for Japan at UBS SuMi TRUST Wealth Management, said, “Japanese stocks are being discussed less frequently than they were during the April-June quarter.” UBS raised its investment view on European equities to “bullish” in August.
Sentiment toward Japanese stocks began to change after July, when companies with fiscal years ending in March announced their April-June results. Although earnings exceeded market expectations, analysts said the results were heavily influenced by one-off factors, including exchange-rate effects, tariff refunds, and inventory valuation gains.
Tomoya Kitaoka, chief equity strategist at Nomura Securities, said, “There are concerns that a backlash from earnings exceeding expectations could emerge in the future.” In other words, strong results have fueled a “fear of heights”—concern that earnings may have already passed their peak.
In the chemical sector, companies raised product prices ahead of time while using raw materials purchased cheaply before tensions surrounding Iran intensified. As a result, profits temporarily increased, analysts said. Shunpei Yoshimura, a senior fund manager at Sumitomo Mitsui DS Asset Management, noted, “Some securities firms’ earnings forecasts for companies are overly optimistic.”
Japanese equities have no clear investment appeal compared with U.S. and European stocks. According to QUICK and FactSet, U.S. companies’ earnings per share (EPS) are expected to rise 30% in 2026 and another 15% in 2027.
Based on projected earnings for next year, the price-to-earnings ratio (PER) is in the 18-times range for U.S. stocks, the 15-times range for Japanese stocks, and the 14-times range for European stocks. Japan trails the U.S. in earnings growth and is more expensive than Europe in valuation.
The yen’s recent appreciation is also lowering earnings expectations for exporters.
Toyota Motor set its assumed exchange rate for fiscal 2026, which runs from April 2026 to March 2027, at ¥160 to the dollar. If the yen strengthens beyond that level, the yen value of overseas earnings will decline. The possibility of further interest-rate hikes by the Bank of Japan (BOJ) could also fuel yen appreciation.
Nikkei forecast that “it will be difficult for substantial buying to flow into Japanese stocks until the ‘true profitability’ of Japanese companies is confirmed in earnings reports for the July-September quarter, which begins in October.”
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