Japan Defense Shares Beats National Benchmark as Abe Beefs Up Military: Chart

Close
Open

Defense-related shares in Japan beat the national benchmark and U.S. peers since Prime Minister Shinzo Abe came to power and embarked on a policy to strengthen the military and lower barriers to arms exports.

The CHART OF THE DAY tracks defense gauges for Japanese, American and European equities and counterpart geographic benchmarks normalized from Dec. 14, 2012, just before Abe led an election victory, through Aug. 18. Goldman Sachs’s new Japan defense measure of 20 companies was the biggest gainer at 72 percent, with the Topix index next at 60 percent. In each pairing, the aerospace-military group beat the broader index, which also included the Standard & Poor’s 500 and FTSE Eurotop 100.

“Since we expect the defense theme to become a long-term secular theme in the Japanese market, we see scope for improved relative performance ahead for related stocks,” Goldman Sachs analysts led by Chief Japan Equity Strategist Kathy Matsui said last week in a research note to unveil the gauge. Mitsubishi Heavy Industries Ltd., Kawasaki Heavy Industries Ltd. and Toshiba Corp. are among the component stocks.

Boosting Japan’s military capabilities has been one of the focuses of the Abe government, amid a territorial dispute with an increasingly assertive China. In 2013 Abe increased the defense budget for the first time in 11 years, and this year relaxed an effective ban on defense exports. Even with the changes, defense spending will account for less than 1 percent of gross domestic product, compared with 4 percent in the U.S. and 1.3 percent in China, according to estimates by Japan’s Ministry of Defense.

Photographer: Yuriko Nakao/Bloomb

National Defense Academy of Japan (NDA) cadets dismantle and reassemble rifles during a class at the NDA campus in Yokosuka, Kanagawa Prefecture, Japan. Close

National Defense Academy of Japan (NDA) cadets dismantle and reassemble rifles during a... Read More

Close
Open
Photographer: Yuriko Nakao/Bloomb

National Defense Academy of Japan (NDA) cadets dismantle and reassemble rifles during a class at the NDA campus in Yokosuka, Kanagawa Prefecture, Japan.

That change “should provide Japanese firms with the opportunity to jointly develop defense technologies and manufacture equipment, as well as boost defense-related exports over time,” the Goldman analysts wrote. Abe’s cabinet also passed a resolution reinterpreting the constitution to allow Japan to defend other countries.

“The challenge for investors is implementation since individual company defense exposures are relatively small” compared with U.S. and European counterparts, Goldman said in the report. About 13.5 percent of Mitsubishi Heavy’s revenue in the first half of calendar 2014 was categorized as defense/space products and services, data compiled by Bloomberg show.

To contact the reporter on this story: Isabel Reynolds in Tokyo at ireynolds1@bloomberg.net

To contact the editors responsible for this story: Rosalind Mathieson at rmathieson3@bloomberg.net Andy Sharp, Andrew Davis

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.