Japan Strategy: Looking for a tech stock bottom

Research evidence excerpt

Japan Strategy: Looking for a tech stock bottom

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23 Jul 2026 07:18:41 ET │ 16 pages

Japan Strategy

Looking for a tech stock bottom

CITI'S TAKE

Ryota Sakagami AC

We believe the Japanese tech stock correction that began from late June +81-3-6776-4653

was triggered by a combination of factors including wariness about ryota.sakagami@citi.com

excessive concentration in tech names, renewed concerns about AI

investment profitability, and risk adjustments ahead of major hyperscaler Keishi Ueda

earnings announcements. However, multiple indicators including +81-3-6776-5110

valuations and divergence from target prices suggest the correction has keishi.ueda@citi.com

already progressed considerably. Unless earnings outlooks deteriorate

significantly, we see limited additional downside, and we believe Japan's

tech sector will likely outperform the market again toward year-end.

Valuation adjustments approaching historical-bottom levels — MSCI Japan IT's

12-month forward PER has declined to historical bottom levels when viewed relative

to the 52-week moving average. The overheating in stock performance relative to

earnings forecast strength is dissipating, and the divergence from target prices has

widened to over 30% for the sector overall. Indicators have generally reached levels

close to past stock price reversal points.

Probability of earnings deterioration scenario remains low — While concerns

persist about the outlook for AI investment and data center demand, we see no

notable deceleration signals in leading indicators such as global semiconductor

sales. Moreover, AI-related investment will likely continue expanding at high levels

even if growth moderates. Markets sometimes focus on slowing investment growth