Japan Value Stocks Rally as Momentum Trade Unwinds, Jefferies Reports

Japan's stock market experienced a dramatic rotation in July 2026, as a sharp selloff in high-momentum and AI-related names fueled a rally in value-oriented equities, according to a new analysis from Jefferies. This unwind suggests a significant shift in market leadership, with investors moving away from previously crowded trades.

A Sharp Reversal

The investment bank reported a stark divergence in performance between different market factors during the month. The shift particularly impacted high-growth and speculative stocks.

• Jefferies' high-beta momentum basket plunged 17.5% in July.
• In contrast, its value laggards basket surged 8.4%.
• Market leadership pivoted decisively toward value, high-yield, and low-volatility stocks.

This weakness was not driven by foreign capital flight. Jefferies noted that foreign investors were net purchasers of ¥0.9 trillion in Japanese stocks through the week ending July 24.

Fund Flows and Earnings Context

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The rotation is also visible in institutional positioning. Japan-focused long-only funds have been reducing their exposure to semiconductor and technology hardware companies, including Advantest, Tokyo Electron, Renesas, and Murata. Concurrently, these funds increased allocations to capital goods firms like Hitachi and Mitsubishi, as well as major financial institutions such as MUFG and Tokio Marine.

This market rotation occurred despite a strong earnings season. With 28% of companies reporting, 70% have surpassed operating profit estimates, with aggregate earnings beating expectations by 21%. However, Jefferies observed that stocks beating earnings forecasts did not outperform, while those that missed estimates declined, further underscoring the momentum-driven nature of the selloff.

Macroeconomic Backdrop

The market shift comes as Japanese and U.S. authorities conducted a coordinated intervention to support the yen after the USD/JPY exchange rate approached 164. Jefferies expects the currency to remain range-bound between 155 and 165. Meanwhile, corporate Japan continues to return capital to shareholders, with companies in the Topix index announcing ¥1.8 trillion in buybacks, a pace exceeding the previous year.