Citi continues to be bullish on Japanese stocks: significantly raises Nikkei 225 target to 90,000 points, with about 30% upside potential before the end of the year!

Citigroup believes the bull market in Japanese stocks is not over and has sharply raised its Nikkei 225 target to 90,000 points. The supporting logic is not just monetary easing, but rather enhanced corporate pricing power, improved profit margins, rising ROE, and continued global liquidity providing conditions for the revaluation of Japanese stocks.

According to the Zhui Feng Trading Desk, in Citigroup’s July 1 Japanese equity strategy report, strategist Ryota Sakagami maintained the TOPIX target at 4,500 points while raising the Nikkei 225 target to 90,000 points. This is a clear upward shift from the June 2 report’s judgment of “breaking 70,000 points before year-end” and a high estimate of 72,000 points, meaning the target range continues to be raised even after the significant rise in Japanese stocks.

Over the past month, Japanese stocks have continued their upward trend, with TOPIX breaking above 4,000 points and the Nikkei 225 rising above 72,000 points. In early June, a rise in U.S. long-term interest rates triggered a pullback, but subsequent progress in Middle East peace negotiations, stabilization of U.S. bond yields, and a smooth Bank of Japan meeting pushed Japanese stocks back onto an upward track.

For investors, the key to this upward revision is not simply chasing the index, but confirming that the market’s main line remains in high-growth, high-momentum, and high-beta assets. Tech stocks remain the core variable for the upward revision of the Nikkei 225 target, and the simultaneous upward revision of earnings expectations prevents them from falling into a typical bubble zone.

From 70,000 to 90,000 points: The upward revision is about earnings and valuation revaluation space

On June 2, Citigroup’s Japan equity strategy team stated in a report that Japanese stocks might temporarily peak in the short term, but the upside potential before year-end remains significant, and there is no need to change the bullish view on Japanese stock fundamentals. At that time, they simultaneously raised the TOPIX target to 4,500 points, corresponding to a 17.5x P/E ratio and an EPS forecast of 258.4 yen for the fiscal year ending March 2028, and estimated the Nikkei 225 high at 72,000 points, judging it could break 70,000 points before year-end.

A month later, the market has already approached or even exceeded the previous estimate of the Nikkei 225 high. The report instead further raises the Nikkei 225 target to 90,000 points. In the July 1 strategy, Ryota Sakagami wrote that the bullish view on Japanese stocks remains unchanged, supported by margin improvement from price pass-through, rising ROE, and ample global liquidity. If the bull market led by tech stocks continues, the TOPIX target is maintained at 4,500 points, and the Nikkei 225 target is raised to 90,000 points.

This means the framework for being bullish on Japanese stocks has not fundamentally changed, only that market verification has been faster than previously expected. The main reason for the Nikkei 225 target upward revision is the upward revision of tech stock earnings expectations and the advantages of index structure; the unchanged TOPIX target indicates a relatively stable path for overall market earnings and ROE improvement.

Price pass-through is the underlying variable: Enhanced corporate pricing power boosts profit margins

The first core logic is the enhanced ability of Japanese companies to pass on prices.

In the past, Japanese companies lacked pricing power for a long time, and cost increases often directly compressed profit margins. The change now is that companies are more actively passing on import costs and input costs to end prices. The improvement in large companies’ output prices shows a positive relationship with the improvement in operating profit margins.

This directly feeds into earnings forecasts. The TOPIX EPS base scenario shows FY26E EPS at 234.9 yen, up 11.5% YoY; FY27E at 261.4 yen, up 11.3%; FY28E at 291.6 yen, up 11.5%. Over the same period, ROE also rises from 10.3% in FY26E to 11.6% in FY28E.

Therefore, maintaining the TOPIX target at 4,500 points does not depend solely on valuation multiple expansion. It emphasizes the continuous upward trend in earnings and ROE. Currently, the TOPIX 12-month forward ROE is 10.3%, and the P/B is 1.76x, leaving room for revaluation in its framework.

Bank of Japan factor: Rate hikes are not a problem; the key is no surprises

Monetary policy is not the only basis for being bullish on Japanese stocks, but the smooth execution of the BOJ meeting has reduced market disruption.

On June 16, the Bank of Japan raised the policy rate from 0.75% to 1.0% and decided to stop reducing its long-term JGB purchases from April 2027. Both decisions were in line with previous media reports and did not bring additional shocks to the market.

For the stock market, the most favorable combination is not “never raise rates,” but rather monetary conditions remaining relatively loose, while exchange rates and long-term interest rates do not experience sharp fluctuations. This meeting fell within this range. The rate hike is digestible, and the bond purchase arrangement avoids runaway long-term rates.

The Bank of Japan also acknowledged that companies are more actively passing on cost increases to prices. This aligns with the logic of improving corporate earnings. As long as rate hikes remain gradual, the path of approximately 10% earnings growth for companies remains intact.

Key bet on the continuation of tech stock earnings

The Nikkei 225’s outperformance over TOPIX is mainly due to its higher weight in tech stocks. As tech stocks have risen rapidly, bubble concerns naturally intensify, but earnings expectations have also been revised upward simultaneously, and stock prices relative to earnings expectations have not yet entered a typical bubble zone.

Calculations show that if tech stock prices only follow the current consensus EPS expectations, they still have a slightly more than 20% outperformance potential relative to TOPIX. Corresponding to approximately 10% upside for TOPIX and about 30% absolute upside for the tech sector, the Nikkei 225’s N/T ratio relative to TOPIX approaching 20x is not an unreasonable assumption. Under this framework, the Nikkei 225 target is raised to 90,000 points.

The main risk for this judgment comes from global data center investment. The fundamental driver of improved earnings for Japanese tech companies is the increase in global data center capital expenditure. If data center investment corrects, Japanese corporate earnings could also be revised downward.

However, in the current path assumption, while hyperscale cloud providers may slow the pace of capital expenditure growth, the probability of actually cutting capital expenditure remains low. As long as capital expenditure continues to grow, the EPS of Japanese tech stocks does not appear to have peaked. Therefore, short-term adjustments are more likely to be mid-cycle fluctuations rather than a signal of the end of the bull market.

Factor changes: High momentum, high growth, high beta still dominate

Year-to-date, factor performance in the Japanese market has been straightforward. Momentum factors over 3-month, 6-month, and 12-month periods are clearly effective; value factors are generally weak, especially with negative contributions from PER and dividend yield; earnings growth and upward earnings forecast revisions contribute positively; high-beta, high-volatility stocks bring significant returns.

This is not just about tech stocks shining alone. Even after excluding AI and semiconductor-related stocks, the overall TOPIX still exhibits similar characteristics. This indicates that the Japanese market is not trading on a single theme, but rather that the overall market risk appetite is tilting toward high growth and high momentum.

The key indicator within tech stocks is PEG. In the already high-valuation tech sector, PEG remains effective, showing that funds are not indiscriminately chasing highs but are looking for companies where earnings growth can justify valuations. In other words, the focus of tech stock selection is not low P/E, but whether growth can digest valuations.

During the rising phase of Japanese stocks, high-beta and high-volatility stocks tend to outperform. Since March, the contribution of the high-beta factor has further strengthened, but this also means increased portfolio risk exposure. When long-short funds chase returns, they easily push risk too high. The logic for low-beta stocks is different. Citi believes that for high-beta sectors, growth and momentum screening are more suitable, while for low-beta defensive stocks, the contribution of the value factor is more significant, and momentum has limited impact.

Behind this is a change in the valuation system of defensive stocks. In the 2010s, overall corporate profit growth in Japan was low, and defensive stocks that could provide stable growth enjoyed valuation premiums. In the 2020s, overall corporate profit growth has risen, but defensive stocks’ growth has fallen below the market average, and valuations have shifted from premiums to discounts.

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