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Welcome to Thoughts on the Market. I'm Shona Kazawa, 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 3pm in Tokyo. Sanae Takaichi became Japan's first female Prime Minister on October 21st, 2025. Xi leads a conservative administration that emphasizes defense spending and economic resilience. When Takai Ji took office in February, this signaled the start of a structure of pivot in Japan's economy and markets have responded quickly. Over the past several months, stocks with high exposure to the administration 17 strategic domains have outperformed topics by 15 percentage points. That kind of divergence suggests something bigger than a cyclical rebound. Capital is positioned to a structural shift first, with 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 reorientation towards a multiple war changed that workflow. Now the emphasis is on redundancy and autonomy and this has implications for defense and space, advanced materials and critical minerals, shipbuilding and cybersecurity. The second pillar of Japan's structural market shift is AI and computer revolution. Yes, some investors worry about over investment in AI, but we believe in possibility of non linear returns as AI breakthroughs occur. And keep in mind, AI isn't just software. It requires data center, cooling, communication 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 US$5 trillion. With aging infrastructure and intensifying natural disasters, resilience spending relates directly to economic security. Ports, logistics and communication systems are increasingly becoming strategic assets. Our work suggests a long term construction cycle is entering an expansion phase as Barbaryla buildings from the late 1980s reach replacement timing that points to durable demand rather than a temporary spike. With all 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 Liao constraint isn't political position, it's 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 lulling, it is reorganizing around economic security, AI infrastructure, international resilience. Thanks for listening. If you enjoy thoughts on the market, please leave us. Review wherever you listen and share the podcast with a friend and colleague today.
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