What’s Driving Japan’s Market Momentum

Global energy shocks and their impact on Asian economies take center stage as Morgan Stanley economists and strategists evaluate the region's mid-year outlook. While Asia remains exposed to oil price volatility, the region has mitigated risks through fuel switching and government subsidies that shielded consumers from inflation. Japan’s reflation story remains intact despite a short-term slowdown, with structural labor shortages and domestic capital expenditure expected to drive nominal GDP growth above 4% next year. In equity markets, Japan holds a distinct advantage over other emerging markets due to its heavy concentration of beneficiaries in the "CapEx super cycle," particularly within AI tech diffusion and the energy transition. Conversely, consumer-facing sectors struggle with earnings downgrades, highlighting a stark dispersion between upstream industrial growth and weakening household demand.