Japan’s Strategic Opportunity

What’s different in Japan’s recovery is that multiple systems – governance, policy, geopolitics, capital flows and technology – are reinforcing each other, dramatically reshaping the local economy and markets. Global investors need to pay attention.

Japan has transitioned to a healthier growth model, with wages and prices rising in a virtuous cycle not seen in decades. Technology, energy security and economic resilience have all become key policy calls. Strategic fiscal impulse amounts to $50 billion, or 1% of GDP, while private sector capex continues to drive real growth. Governance reforms have already spawned major changes in corporates’ approach to growth and capital allocation. Dividends and share buybacks have increased 2.5x since 2020. And the scope of reforms is set to widen. Japan has one of the largest pools of underinvested capital globally. Even a gradual reallocation can have a large market impact: households still keep ~50% of their wealth, or $7 trillion, in bank deposits. After decades of deflation and low growth, Japan’s growth model and its competitive role in the global economy are transforming. Market governance reforms have driven behavioral change among companies and consumers. Japanese corporates are rethinking how capital, investment, governance and strategic planning coalesce, while households are shifting their asset allocation away from cash. Japan plays a key role in the Asian capex super-cycle. Morgan Stanley Research estimates that Asia’s capex will rise from $11.3 trillion today to $15.8 trillion in 2030, with Japan’s capex increasing to $1.7 trillion. Private capex growth has been a standout and aligns with key global drivers – AI infrastructure investment, energy security and defense. The majority of that spend lies ahead. Geopolitics and national security will add a layer of complexity and markets will price in broad power and energy sensitivities. Amid these uncertainties, Japan’s macro and market transition demands attention. 1. A real shift in inflation and behavior The most important change is simple: prices and wages are rising, and people and corporates believe this will continue. For years, Japan’s economy was defined by caution. Companies avoided raising prices, workers didn’t expect pay increases and households kept their money in cash. As that mindset changes, it’s powering a healthier growth model where nominal growth supports earnings instead of being held back by deflation. Source: Cabinet Office, Morgan Stanley Japan Economics Research Note: Nominal GDP from 3Q2025 and beyond shows our forecast. Source: FAME, Morgan Stanley Japan Economics Research 2. Policy, industrial super-cycle and geopolitics are driving investment Global and regional shifts are reinforcing Japan’s resurgence. Asia’s industrial super-cycle, with capex reaching an annual run rate of $16 trillion annual run rate by 2030, strongly benefits Japan. Structural demand for AI, energy security and defense capabilities is driving both domestic capex and export demand. Rising geopolitical tensions, especially between the U.S. and China, are forcing companies to rethink where they invest and produce. Japan is emerging as a preferred alternative for sensitive supply chains. At the same time, Japan is investing in technology, energy, infrastructure and industrial capacity – strategic areas where economic security now matters as much as efficiency did historically. Domestic investment aligns with recent FDI inflows, focused on semiconductors, advanced manufacturing and broader tech infrastructure. Strategic fiscal impulse amounts to $50 billon, or 1% of GDP, while private capex continues to drive real growth. Japan is becoming a strategic industrial hub in a more fragmented global economy. 3. Corporate Japan is changing faster than expected Macro change and governance reform are now clearly visible at the company level. Japanese firms are focusing on returns, growth and capital efficiency, laying the foundation for a sustained equity market re-rating and opportunities across public and private markets. We’re already seeing this play out. Japan Inc. has made serious progress in balance sheet restructuring and simpler ownership structures. Japanese institutions are incr

For Investors: "The biggest change I have noticed recently is in the national psyche. Individuals, corporates and financial institutions are thinking differently and are under pressure to rebalance their portfolios as they face risks and opportunities not encountered during three decades of deflation." - Alberto Tamura, Japan CEO “A decade ago, we at Morgan Stanley Research called Japan the most under-appreciated turnaround story in global equities. Reflation, productivity gains and ROE improvement have been powerful drivers of a new secular equity bull market. It is exciting to see not only foreign investors returning to Japan equities, but also a new cohort of domestic Japanese investors.” - Jonathan Garner, Chief Asia Strategist “The stars are aligning for increased allocations to equities in Japan. Beyond structural macro changes, corporate governance reforms are driving higher ROEs, earnings growth and share buybacks. This inflationary and equity market backdrop finally supports a tangible migration of household assets to investments.” - Michael Levin, Head of MSIM, Asia "The biggest change I have noticed recently is in the national psyche. Individuals, corporates and financial institutions are thinking differently and are under pressure to rebalance their portfolios as they face risks and opportunities not encountered during three decades of deflation." - Alberto Tamura, Japan CEO “A decade ago, we at Morgan Stanley Research called Japan the most under-appreciated turnaround story in global equities. Reflation, productivity gains and ROE improvement have been powerful drivers of a new secular equity bull market. It is exciting to see not only foreign investors returning to Japan equities, but also a new cohort of domestic Japanese investors.” - Jonathan Garner, Chief Asia Strategist “The stars are aligning for increased allocations to equities in Japan. Beyond structural macro changes, corporate governance reforms are driving higher ROEs, earnings growth and share buybacks. This inflationary and equity market backdrop finally supports a tangible migration of household assets to investments.” - Michael Levin, Head of MSIM, Asia For Companies: “The corporate landscape feels more transparent and increasingly attuned to global standards. This matters to everyone interested in Japanese assets or strategic partnerships. The barriers are lowering and the opportunity set is widening. Wide-ranging governance and market reforms created a virtuous cycle. Corporates are simplifying historically complex group structures and applying discipline to capital allocation. Altogether, this points to a more dynamic, accountable and competitive corporate landscape in Japan.” - Kensaku Bessho, Head of IBD Japan “The corporate landscape feels more transparent and increasingly attuned to global standards. This matters to everyone interested in Japanese assets or strategic partnerships. The barriers are lowering and the opportunity set is widening. Wide-ranging governance and market reforms created a virtuous cycle. Corporates are simplifying historically complex group structures and applying discipline to capital allocation. Altogether, this points to a more dynamic, accountable and competitive corporate landscape in Japan.” - Kensaku Bessho, Head of IBD Japan This material is solely for informational purposes, and is not a Research Report as defined under FINRA regulations. Morgan Stanley does not undertake to update this material and the conclusions discussed may change without notice. Morgan Stanley shall not in any way be liable for claims relating to this material and makes no express or implied representations or warranties as to its accuracy or completeness or for statements or errors contained in, or omissions from, them. Certain information contained in this material may constitute “forward-looking statements”, and there is no guarantee that such results will be achieved. Past performance is not necessarily a guide to future performance

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