Episode summary
What’s Driving Japan’s Market Momentum
Thoughts on the Market (Morgan Stanley)
· · 11 min · Hosts: Seth Carpenter
Summary
Morgan Stanley’s Japan summit conversation centered on how the recent energy shock is rippling through Asia and why Japan still looks like a structural re-rating story. The analyst argued that Asia has managed the shock better than expected, with U.S. supply gains, China’s lower imports, and fuel switching across the region helping prevent shortages and limiting pass-through to consumers.
For Japan, the guest said the near-term picture is softer because higher oil prices and trade pressures are weighing on real and nominal GDP, while producer prices have already jumped sharply. Even so, the guest argued the underlying case remains intact: household pain has been cushioned by subsidies and strategic reserves, labor is still tight, wage growth should continue, and capex should stay supported by labor-saving investment and government initiatives.
On equities, the analyst said Japan remains preferable to broader EM because Japanese markets are better positioned for the capex super cycle and have wider exposure to Morgan Stanley’s key themes, including AI tech diffusion and the future of energy. The guest also said revisions are diverging sharply, with consumer-linked sectors being downgraded while energy, materials, semis, IT, hardware, and defense capital goods are seeing upgrades.
Key takeaways
- The guest expects Japan’s nominal GDP to be slightly negative this year but about 4% next year as the temporary terms-of-trade shock fades.
- The guest said Japan’s direct household impact from higher energy prices has been limited by subsidies and relatively large strategic oil reserves.
- The analyst prefers Japanese equities over EM because Japan has deeper exposure to the capex super cycle and Morgan Stanley’s four core themes.
- The analyst said consumer-related revisions are broadly being downgraded, while energy, materials, semis, IT, hardware, and defense capital goods are seeing upgrades.
- The guest said Japan’s structural labor shortage should keep wage growth and domestic capex resilient even if growth slows short term.
Notable quotes
“Asia is one of the more exposed part of the world, but I would say that we've been surprised in the way this energy shock has been managed”
“we still believe that you know underlying economic fundamentals remain resilient in the sense that there's a structural labor shortage”
“So next year we think this year for nominal GDP growth we expect slightly negative growth due to the terms of trade loss but the next year we are expecting about 4% nominal GDP growth”
“Japan should be at the core of any Asia portfolio uh at the moment”
How the episode opens
Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research, and on today's episode we're bringing you a live taping direct from Morgan Stanley and MUFG's Japan Summit to discuss the macroeconomic outlook and in particular Japan's moment, reflation, reform, and the case for a structural re-rating. I am joined by Chetan Ahya, our Chief Asia Economist Takeshi Yamagushi, our Chief Japan Economist Jonathan Garner, our Chief Asia and EM Equity Strategist Koji Sugisaki, who is our Head of Japan Macro Strategy, and Show Nakazawa, who is our Japan Equity Strategist.
I will say we have just collectively published our mid-year outlook. So, twice a year Morgan Stanley Macro Research puts together our forecast. We take the time to debate with each other, to pressure test our views on the outlook for the next year and a half to two years.
And I have to say this version of the outlook process may have been the most difficult one that I can remember, and in no small part because one of the key fundamental drivers of the outlook globally for growth, for inflation, is oil, oil prices, and the swings there have been pretty dramatic. And so, as a result, we put a lot of effort into not just our baseline forecast, but also scenarios and the ways in which our baseline forecast could be wrong. But, Chetan, let me start with you.
Tell us a little bit about the exposure in Asia to to the energy shock. So, Seth, you're right. Asia is one of the more exposed part of the world, but I would say that we've been surprised in the way this energy shock has been managed.
One is, of course, at the global level, two big swings happened.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- japan market momentum
- asia energy shock exposure
- japan bullish outlook
- macro research
- risk to global markets
Companies and tickers mentioned
- MS
- Morgan Stanley
- MUFG
Watch the episode
Watch “What’s Driving Japan’s Market Momentum” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
More from Thoughts on the Market (Morgan Stanley)
Thoughts on the Market (Morgan Stanley), this episode and its artwork belong to Morgan Stanley. Octagon is not affiliated with the show; this page is an independent summary.
