By Momoka Yokoyama

(Bloomberg) -- US investors are increasingly buying Japanese stocks focused on tech and artificial intelligence, lured by the country’s outsized returns compared with US stocks, according to Goldman Sachs Group Inc.

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“The increase in US flows is now moving at the fastest pace we’ve seen since Abenomics,” said Bruce Kirk, the bank’s chief Japan equity strategist. US investor active participation in Japanese equities is at the highest level since October 2022, Kirk said, adding that he gets frequent requests for meetings.

The inflow of US funds reflects the strong performance of Japanese equities in dollar terms this year. They have been helped by a 2.5% gain in the yen and renewed optimism driven by the pro-stimulus policies of Prime Minister Sanae Takaichi. The benchmark Nikkei 225 index has climbed about 30% in dollar terms this year, far outpacing the S&P 500 index’s 14% gain.

Rising participation from US funds could mark a turning point for Japan’s equity market, signaling a potential shift in drivers to growth-oriented shares from value stocks. Driven by pro-investor initiatives from the Tokyo Stock Exchange and the government, value stocks have outperformed growth stocks for four consecutive years since 2021.

“It’s very significant that you’ve got more US participation coming and they tend to gravitate toward tech and AI-related themes,” Kirk said in an interview on Nov. 6.

Kirk sees further upside in foreign fund inflows as global investors’ net positions in Japanese equities remain light compared with the peak of Abenomics, leaving room for further buying. Global investors’ continued diversification needs will likely sustain that trend, he said.

Foreign investors bought a net 384 billion yen ($2.5 billion) of Japanese equities in cash and futures in the last two weeks of October, according to data released by Japan Exchange Group.

Even so, given that the Nikkei entered overbought territory in late October, Kirk said he would not be surprised to see the market consolidate.

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