Japanese Equities Offer Attractive Entry Point After Pullback, UBS Says

A sharp increase in market volatility has made Japanese equities more appealing, with valuations now at an "attractive entry point" for investors, according to a note from UBS. The firm is maintaining its "Attractive" view on the market despite a significant single-day sell-off.

Volatility Spike Signals Opportunity

The analysis follows a turbulent trading session on Friday that saw Japan's Nikkei 225 index fall 5.8% and the broader TOPIX index decline 3.9%. According to the note from UBS analysts Chisa Kobayashi and Daiju Aoki, the Nikkei Volatility Index surged to 40, a level it has surpassed only 4.0% of the time since its inception in 2001.

UBS highlighted that historical data suggests such volatility spikes have often preceded strong returns. The bank noted that the average six-month return for both the TOPIX and Nikkei 225 has been above 10% following periods when the volatility index exceeded the 40-point mark.

Sell-Off Seen as Sector-Specific

UBS does not believe the recent downturn signals a "broad risk-off phase" for the Japanese equity market. The analysts attributed much of the volatility to spillover effects from South Korea's KOSPI, noting that semiconductor-related stocks comprise 38% of the Nikkei 225, a similar composition to the Korean index.

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The firm observed that the sell-off was largely concentrated in the information technology sector. In contrast, defensive sectors such as health care and consumer staples posted positive returns, suggesting the market pressure was not widespread.

Favorable Outlook on Earnings and Valuations

Looking ahead, UBS stated that Japan's earnings cycle "remains firmly in an expansion phase." The bank forecasts 10% earnings growth for fiscal 2026, supported by margin expansion, improving corporate pricing power, and Japan's strategic position in the global artificial intelligence value chain.

Following the pullback, the TOPIX index's forward price-to-earnings (P/E) ratio has fallen to 16.3x from 17.0x in June. UBS described this level as an attractive entry point, especially when considering Japan's improving return on equity (ROE), which is nearing 10%, and the positive impact of ongoing corporate governance reforms.