Navigating Japanese Equities in the Tariff Era: Tech and Defense Lead the Way

The U.S. tariff regime reshaping global trade has created both challenges and opportunities for Japanese companies, particularly in the technology and defense sectors. As supply chains reorient under the “friendshoring” strategy, Japan is positioning itself as a critical partner to the U.S., driving growth in sectors like semiconductors and advanced manufacturing. For investors, this presents a compelling case to explore companies like Tokyo Electron (TYO: 8035) and Mitsubishi Heavy Industries (TYO: 7011), which are capitalizing on geopolitical shifts while navigating risks tied to currency volatility and escalating trade tensions.

Tech Sector: Semiconductor Leadership and EV Supply Chain Shifts

Japan's technology sector is at the forefront of U.S.-led “friendshoring,” with Tokyo Electron emerging as a key beneficiary. The company's semiconductor equipment—critical for chip manufacturing—is in high demand as the U.S. and Japan collaborate to reduce reliance on Chinese suppliers. Under the U.S. CHIPS and Science Act, partnerships between Tokyo Electron and firms like TSMC and Micron Technology are accelerating advanced chip production.

Recent data shows Tokyo Electron's stock has surged 22% year-to-date, driven by 18% growth in equipment orders for AI and 5G infrastructure. Analysts project a 31.7% upside to its current price, citing government subsidies under Japan's ¥3.9 trillion semiconductor investment plan and U.S. export controls on China's chip industry.

The EV and battery sector also benefits from U.S. tariffs on Chinese imports, which have pushed Japanese automakers like Toyota to shift production to North America. Panasonic's U.S. battery plants, supported by the Inflation Reduction Act, exemplify how Japan is leveraging tariff policies to strengthen its EV supply chain footprint.

Defense Sector: A New Era of Spending and Alliances

Japan's defense budget is set to double by 2027, with Mitsubishi Heavy Industries (MHI) at the epicenter of this spending boom. MHI's Aircraft, Defense & Space (ADS) segment reported a 38% rise in operating profit in 2024, fueled by contracts like the ¥56 billion hypersonic missile defense system and participation in the trilateral Next-Generation Fighter (NGF) project with Italy and the UK.

MHI's defense backlog now exceeds ¥2.6 trillion, with FY2025 revenue expected to jump 40%. This aligns with Japan's strategic pivot toward advanced capabilities, including AI-driven surveillance systems and partnerships under the Supply Chain Resilience Initiative (SCRI) with India and Australia.

Risks: Currency Volatility and Escalating Tariffs

While opportunities abound, risks loom large. The yen's depreciation (USD/JPY at 146.008) cuts both ways: it reduces repatriation profits for exporters but eases import costs for raw materials. A stronger yen could pressure companies reliant on overseas sales, while further U.S. tariffs could disrupt supply chains.

Geopolitical uncertainty also persists. Japan's dual reliance on U.S. security guarantees and Chinese trade creates a balancing act. A sudden escalation in tariffs or a slowdown in global chip demand could dampen growth for Tokyo Electron and MHI.

Key Plays: Tokyo Electron and Mitsubishi Heavy Industries

1. Tokyo Electron (TYO:8035)
2. Why Invest? Dominates semiconductor equipment, benefits from U.S.-Japan collaboration, and enjoys a 28.3% return on equity.
3. Risks: Cyclical semiconductor demand and over-supply risks.

4. Action: Buy with a 12-month price target of ¥32,100, focusing on long-term AI/5G trends.

5. Mitsubishi Heavy Industries (TYO:7011)

6. Why Invest? Leverages Japan's defense boom and energy infrastructure needs (e.g., gas turbines, nuclear projects).
7. Risks: Supply chain disruptions and geopolitical headwinds.
8. Action: Accumulate shares targeting FY2025's 9.6% profit growth, with a focus on dividend yield (~2.5%).

Conclusion: Navigating the New Trade Landscape

Investors in Japanese equities must balance geopolitical tailwinds with macroeconomic risks. Tokyo Electron and MHI represent two pillars of Japan's strategic realignment—tech leadership and defense autonomy—both poised to benefit from U.S.-led supply chain shifts.

Recommendation:
- Aggressive investors: Allocate to Tokyo Electron for semiconductor upside, paired with hedging against yen volatility.
- Conservative investors: Focus on MHI's stable defense contracts and dividend growth, while monitoring BOJ policy shifts.

The path forward is clear: Japan's tech and defense sectors are rewriting the rules of global trade. For those willing to navigate the risks, the rewards could be substantial.