Japan’s equity investors will closely watch a meeting between President Donald Trump and Prime Minister Sanae Takaichi in Washington on Thursday for possible agreements on economic and military cooperation.
Any details on Japan’s $550 billion government-backed investment plan in the US has potential to impact energy and shipbuilding sectors. Defense stocks may react as Takaichi faces a diplomatic challenge after Trump called on Japan to deploy warships to the Strait of Hormuz and then withdrew the demand.
With the Iran war set to enter its fourth week, investors are waiting to see how the leaders will respond to a surge in oil prices that has pulled Japan’s benchmark indexes off record highs. The Bank of Japan added the Middle East to its list of risk factors as oil extended gains.
“Clearly this summit is important,” said Piergaetano Iaccarino, the head of equity solutions at Amundi Ireland Ltd. “It confirms the strategic alignment between Japan and the United States, especially at this time when the economic security and industrial policies are getting more and more important.”
Other market-moving topics may touch on trade tariffs, currency policy and relations with China.
Energy Firms
Japan and the US are making final arrangements to announce a second round of potential projects as part of the $550 billion investment pledge, NHK reported on Wednesday. They are set to issue a joint statement outlining three projects including a next-generation nuclear reactor in Tennessee and natural gas power generation facilities in Pennsylvania and Texas, according to the report, which said the second round of investments may total as much as $73 billion.
Mitsubishi Heavy Industries Ltd., Toshiba Corp. and IHI Corp. have shown interest in a Westinghouse Electric Co.-led project worth up to $100 billion, according to a government fact sheet released in October. Hitachi GE Vernova was also named for possible involvement in the construction of advanced nuclear reactors.
“The US investment plan is likely to be a catalyst for the energy-related stocks,” said Hisashi Arakawa, head of Japan equities at Aberdeen Investments, who invests in Hitachi Ltd. “When security issues make it difficult to turn to Chinese firms, Japanese companies like Hitachi naturally emerge as the leading candidates.”
Defense Shares
Discussions of increased defense spending or closer US-Japan military cooperation could spur speculation that revenue will increase for companies like Kawasaki Heavy Industries Ltd. and Mitsubishi Heavy. Japan is planning to tell the US at the summit that it will join Trump’s “Golden Dome” missile defense initiative, according to a Yomiuri newspaper report last week.
“Given the external environment, defense is sensible to focus on,” said Chris Smith, co-manager of the Japan Value Fund at London-based Polar Capital. “What’s going on with Iran has probably made Japan even more of a critical partner for the US in Asia and Japan is well positioned to play into that.”
Defense shares have been among the biggest beneficiaries of the “Takaichi Trade,” as the administration moves to raise spending on the sector. Kawasaki Heavy, which makes heavy machinery for military use, has gained 84% since Takaichi won the ruling party’s leadership race in October, while shares of IHI, an aircraft engine maker, have rallied 55%.
Aberdeen’s Arakawa said the US-Japan summit could support undervalued arm makers. He holds shares of explosive chemicals producer Carlit Co.
Others remain cautious that defense talks could complicate the summit, as Japan remains reluctant to send ships to the Strait of Hormuz.
“If Japan is unable to accept the US demands, there is a risk it could create friction in US-Japan relations,” said Tomo Kinoshita, a global market strategist at Invesco Asset Management Japan. “If strains emerge in US-Japan relations, there is a possibility that additional tariff measures could be applied to Japan in the future.”
Critical Minerals
Companies related to critical minerals may get a boost on any announcement of cooperation on rare-earth elements, after Beijing imposed export controls against Japanese corporations following remarks by Takaichi that a Chinese invasion of Taiwan could be considered an “existential threat.”
Mitsubishi Materials Corp. shares surged earlier this week after a Nikkei report that it will participate in a joint rare earths project with the US. The two nations will agree on cooperative development at this week’s meeting, the report said.
“The rare earth supply chain and how the US can help will be a top topic,” said Neil Newman, head of strategy at Astris Advisory Japan, who recommends rare-earth exposure through names including Sojitz Corp. and Toyota Tsusho Corp. “Talks with the US will demonstrate strengthened cooperation with allied countries to build alternative supply networks for critical minerals.”
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