US investors are returning to Japanese stocks as confidence recovers from the initial shock of the Middle East crisis, according to Goldman Sachs Japan Co.’s chief Japan equity strategist. After exiting Japanese equities in early 2024 due to geopolitical risks, institutional buyers now see improved stability in Tokyo’s market. The strategist notes that fading war tensions and stronger corporate earnings reports have reignited interest, with US capital flows into Japan ETFs and direct equity investments accelerating in recent weeks.

The market rebound reflects broader shifts in global risk appetite. Japanese equities, which underperformed during the crisis due to yen volatility and export sector concerns, are gaining traction as investors reassess regional growth prospects. Goldman Sachs highlights rising liquidity in Tokyo’s stock market, with foreign ownership of Japanese equities reaching multi-year highs. This trend could boost deal values for Japanese firms seeking cross-border partnerships or capital raising.

The strategist emphasizes that Japan’s economic fundamentals remain attractive despite lingering uncertainties. Strong domestic demand, resilient manufacturing, and policy support for tech innovation are drawing attention. However, he cautions that geopolitical volatility in the Middle East could resurface as a risk factor, urging cautious portfolio diversification. Business leaders are closely monitoring how US-Japan trade dynamics and regional security developments might shape investment flows.

This shift in investor behavior signals potential long-term benefits for Japan’s economy. Increased foreign capital could stimulate mergers and acquisitions, while heightened demand for Japanese assets may pressure the yen higher. Yet analysts warn that sustained inflows depend on maintaining stable geopolitical conditions and avoiding renewed volatility in global oil markets. The situation underscores the delicate balance between recovering from crisis shocks and navigating persistent macroeconomic headwinds.