Autor: Rainer Michael Preiss – Global Markets Commentary

Japan’s defense sector has moved from structural stagnation to a multi‑year growth phase.

Driven by the country’s largest military build‑up since World War II, rising geopolitical tensions in Northeast Asia,

and a gradual normalization of export rules, Japanese defense equities are emerging as a high‑beta thematic allocation within Japan equities.

For global investors, Japanese defense names offer:

• Structural earnings visibility tied to government budgets
• Exposure to Indo‑Pacific security dynamics
• Beneficiaries of yen weakness (export competitiveness)
• Low historical foreign ownership relative to U.S. defense peers

Within a diversified global portfolio, the sector deserves consideration as a satellite allocation within Japan equities.

1. Macro Backdrop: Japan’s Defense Regime Shift

Japan is undergoing a historic policy pivot. The government has committed to raising defense spending toward

approximately 2% of GDP by FY2027, roughly doubling the budget from prior levels.

Key investment areas include:

• Missile defense and counter‑strike capability
• Space and cyber defense
• Next‑generation fighter programs
• Ammunition and logistics resilience

Investment implication: the current build‑up is multi‑year and policy‑anchored, improving earnings visibility.

2. Structural Characteristics of Japan’s Defense Industry

Historically constrained by export restrictions and low margins, the sector is now gradually normalizing due to:

• Relaxation of defense export guidelines
• Participation in multinational programs
• Government support for domestic defense capacity

Strategic takeaway: the sector is transitioning toward globally competitive defense primes.

3. Core Listed Japanese Defense Plays

Mitsubishi Heavy Industries (7011.T)

Japan’s premier defense prime contractor with exposure across air, naval, missile, and space systems.

Bull case: largest beneficiary of rising defense budget and strong backlog visibility.

Risk: conglomerate complexity and execution risk.

Kawasaki Heavy Industries (7012.T)

Key supplier of military aircraft, helicopters, and submarine components.

Bull case: rising demand for air mobility and maritime security.

Risk: commercial aerospace cyclicality.

IHI Corporation (7013.T)

Specialist in aircraft engines and propulsion systems.

Bull case: structural growth in engine maintenance and high technical barriers.

Risk: aerospace cycle sensitivity.

4. Emerging Second‑Tier Beneficiaries

Additional names to monitor include Japan Steel Works, NEC Corporation, Fujitsu, and Subaru Corporation.

5. Portfolio Construction Framework

Suggested allocation:

• Japan equities: 5–10% of global equities
• Japan defense sleeve: 0.5–2.0%

Implementation:

Core: Mitsubishi Heavy Industries

Satellite: Kawasaki Heavy Industries, IHI Corporation

Optional: defense electronics (NEC, Fujitsu)

6. Key Catalysts (2026–2028)

Positive:

• Continued defense budget expansion
• Fighter program milestones
• Export policy liberalization
• Weak yen

Risks:

• Political backlash
• Budget slippage
• Program overruns
• Rapid yen appreciation
• ESG exclusion pressure

Bottom Line

Japan’s defense sector is undergoing a structural shift that could drive multi‑year earnings growth and valuation rerating.

For globally diversified investors, Japanese defense equities represent a compelling thematic satellite allocation within Japan exposure.

Important Disclaimer

This material has been prepared for informational purposes only and does not constitute

investment advice, an offer, or a solicitation to buy or sell any security or financial

instrument. Investments in defense and aerospace companies may be subject to elevated

political, regulatory, geopolitical, and ESG-related risks.

Defense sector revenues are often dependent on government budgets, procurement cycles,

and policy decisions, which can change materially and without notice. Geopolitical

developments may increase volatility in defense-related equities. Past performance is not

indicative of future results.

Investors should consider their individual investment objectives, risk tolerance, and

portfolio diversification requirements before making any investment decision. Defense

stocks should typically represent only a limited allocation within a globally diversified

portfolio.

Rainer Michael Preiss – Global Markets Commentary

For professional investors and private clients only. Not for retail distribution where

prohibited. No liability is accepted for any loss arising from the use of this material.