Morgan Stanley MUFG ’s Japan Equity Strategist Sho Nakazawa talks
about the sectors that are leading the current rebound of
Japanese stocks and why these gains may be more than a cyclical
shift.
Read more insights from Morgan Stanley.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Sho Nakazawa, Japan Equity
Strategist at Morgan Stanley MUFG Securities.
Today: How Japan’s Takaichi administration could define Japan’s
stock market for years to come.
It’s Tuesday, March 17th, at 3 PM in Tokyo.
Sanae Takaichi became Japan's first female prime minister on
October 21, 2025. She leads a conservative administration that
emphasizes defense spending and economic resilience. When
Takaichi took office in February, this signaled the start of a
structural pivot in Japan’s economy. And markets have responded
quickly. Over the past several months, stocks with high exposure
to the administration’s 17 strategic domains have outperformed
TOPIX by 15 percentage points. That kind of divergence suggests
something bigger than a cyclical rebound. Capital is positioned
to a structural shift.
First, there’s the Japanese government’s increased emphasis on
economic security and supply chain resilience. This reflects a
philosophical shift. For years efficiency ruled: just-in-time
supply chains and global optimization. The pandemic and the
reorientation towards a multipolar world changed that workflow.
Now the emphasis is on redundancy and autonomy – and this has
implications for Defense & Space, Advanced Materials &
Critical Minerals, Shipbuilding, and Cybersecurity.
The second pillar of Japan’s structural market shift is AI and
the compute revolution. Yes, some investors worry about
overinvestment in AI, but we believe in [the] possibility of
nonlinear returns as AI breakthroughs occur. And, keep in mind,
AI isn’t just software. It requires data-center cooling,
communications networks, expanded power grids, and critical
minerals. This is a full industrial stack upgrade. Looking
further out, the global humanoid robotics market could reach
US$7.5 trillion annually by 2050 according to our global robotics
team estimates. That’s roughly three times the combined 2024
revenue of the world’s top 20 automakers at about US$2.5
trillion.
The third force reshaping Japan’s market is infrastructure. The
2026 budget slated towards national resilience initiatives
exceeds ¥5 trillion. With aging infrastructure and intensifying
natural disasters, resilience spending relates directly to
economic security. Ports, logistics, and communications systems
are increasingly becoming strategic assets. Our work suggests the
long-term construction cycle is entering an expansion phase as
bubble-era buildings from the late 1980s reach replacement
timing. That points to durable demand rather than a temporary
spike.
With all of this said, what’s also important is how stock market
leadership spreads. It tends to move from upstream to downstream
– from materials and power infrastructure, to AI, to defense and
communications, and eventually to applications like drug
discovery, quantum technologies, cybersecurity, and content.
Right now, the strongest three-month returns are in Advanced
Materials and Critical Minerals, and in Next-Gen Power and Grid
Infrastructure. Meanwhile, areas like Cybersecurity and Content
have lagged but remain tightly connected in the network. If
leadership broadens, those linkages matter.
The real constraint isn’t political opposition. It’s [the] market
itself. If investors decide this is a temporary stimulus rather
than sustainable earnings growth, valuations might adjust. But we
do believe that Japan’s equity market isn’t simply rallying. It
is reorganizing around economic security, AI infrastructure, and
national resilience.
Thanks for listening. If you enjoy Thoughts on the Market, please
leave us a review wherever you listen and share the podcast with
a friend and colleague today.
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