Overseas investors appear to have lost their appetite for Japanese equities after a lengthy buying spree. This has presumably been due to the continued underperformance of Japan’s stock market despite historically attractive valuations. The most plausible explanation for this relatively poor showing is the persistent strength of the yen, which we doubt will last. Although we do not think the Nikkei 225 will end this year higher than it is now, we still expect it to perform less badly than the US S&P 500.