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.

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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.

Our Head of Asia Technology Research Shawn Kim explains what disruptions to shipping in the Strait of Hormuz could mean for the global semiconductor supply chain and the immediate future of AI infrastructure.

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Welcome to Thoughts on the Market. I’m Shawn Kim, Head of Morgan Stanley’s Asia Technology Team.

Today: why the Strait of Hormuz closure may matter to the global technology industry.

It’s Friday, March 13th, at 8 pm in Taipei.

AI and advanced chips may represent the cutting edge of technology, but they depend on something far more basic: that’s energy. And a large share of that energy flows through one narrow shipping lane in the Middle East – the Strait of Hormuz. When energy supply chains are disrupted, the effects can quickly ripple into semiconductor manufacturing.

Advanced semiconductor fabrication is, in fact, one of the most energy‑intensive industrial processes in the world. Take Taiwan, for example – home of the world’s largest share of leading-edge chip production. Just one major manufacturer alone accounts for roughly 9–10 percent of the country's total electricity consumption. That scale of energy use means the stability of power supply is critical.

Taiwan relies heavily on imported LNG to generate electricity. But storage levels are limited. It maintains roughly one and half weeks worth of LNG inventory, with several additional weeks supplied by vessels currently at sea. If shipping through the Strait of Hormuz were significantly disrupted, that supply chain could come under pressure. The immediate impact might not necessarily be an outright shortage – but rising energy costs could still affect semiconductor production economics. And that's important because advanced chips are foundational to everything from cloud computing to artificial intelligence systems.

Energy isn't the only potential bottleneck. Another lesser-known input in the semiconductor ecosystem is sulfur. More than 90 percent of the world's sulfur supply is produced as a by‑product of oil refining. That sulfur is then used to produce sulfuric acid, a key chemical that supports semiconductor materials, metal processing, and battery components.

Disruptions in oil refining tied to shipping constraints or energy market shocks could also affect sulfur supply. In other words, a disruption in energy markets could trigger second‑order effects across multiple layers of the technological supply chain. And those effects extend beyond chips themselves. The downstream impact touches industries tied to electrification, data centers, and advanced electronics manufacturing.

History also offers some lessons learned about how technology markets react when energy prices spike. During periods of major oil price surges – such as in 2008 and again in 2021 through 2022 – semiconductor equities experienced significant drawdowns. In both cases, semiconductor stocks declined by roughly 30 percent before reaching an inflection point. The mechanism is fairly intuitive. Higher oil prices raise costs across the economy and can weaken consumer spending. At the same time, companies building energy‑intensive infrastructure – like large‑scale AI data centers – may face higher operating costs and low revenues.

So when energy markets move sharply, technology markets often move with them. A disruption in the Strait of Hormuz wouldn’t automatically halt chip production, but it could ripple through power costs, materials supply, and the economics of building AI infrastructure. And that highlights an important reality for investors: the future of technology isn’t just written in code. It’s powered by energy, by infrastructure, and the fragile global networks behind the digital economy.

Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.