Japanese equities declined sharply in March as heightened geopolitical tensions in the Middle East drove a renewed rise in risk aversion, particularly given Japan’s heavy reliance on imported energy. Concerns over potential disruptions to key energy supply routes, alongside higher crude oil prices, weighed on market sentiment, resulting in a broad‑based sell‑off across major indices.
Recent macroeconomic data continues to point to a resilient domestic backdrop. Economic growth in late 2025 was revised higher on the back of firm private demand, real wages have turned positive, and spring wage negotiations delivered another year of robust increases. Inflation has moderated in the near term, while medium‑term inflation expectations remain elevated, allowing the Bank of Japan (BOJ) to maintain a cautious and data‑dependent approach to policy normalisation.
Corporate sentiment, however, has already turned more conservative. The March BOJ Tankan survey indicates that companies have moved early to adopt a cautious outlook for FY2026, reflecting uncertainty around input costs and external conditions. This cautious stance is likely to be reinforced when management teams release full‑year guidance during the April–May earnings season, potentially extending the gap between prudent corporate assumptions and market expectations.
From a market perspective, much of the near‑term risk appears to have been absorbed through valuation adjustment. As of end‑March 2026, Japan’s 12‑month forward price‑to‑earnings ratio had declined to the low‑15x range, suggesting a more balanced risk‑reward profile. Market dynamics indicate that selling pressure has eased, with the environment gradually shifting from indiscriminate risk reduction toward greater selectivity.
Looking beyond near‑term volatility, structural tailwinds remain intact. Policy continuity and ongoing progress in corporate governance continue to support gradual improvements in capital efficiency, underpinning the longer‑term investment case for Japanese equities amid a complex and fluid external environment.
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Written by Kazuhiko Hosaka, Senior Product Specialist, Asset Management One Co., Ltd