On the Ground in Japan: Industry Insights

Japan’s financial sector is entering a new phase as the country moves toward long‑overdue interest rate normalization. Despite solid nominal economic growth and three consecutive years of wage increases above 5%, the Bank of Japan’s policy rate remains deeply negative in real terms. Conversations on the ground indicated a broad recognition that this backdrop is unsustainable. We think this bolsters the case for lifting rates toward a more neutral 1.5 percent level, potentially paving the way for the Bank of Japan to lift rates for the first time this year in June. For banks, this shift represents a material tailwind: a normalization of the policy rate would directly strengthen net interest margins and support profitability.

At the same time, political developments are reinforcing the broader macro impulse. Takaichi’s recent landslide victory has reinforced expectations of more expansionary fiscal policy, which would require increased government bond issuance and, in turn, place upward pressure on long‑end JGB yields. This shift is occurring alongside improving credit conditions, with loan growth running at approximately 5.4%.¹ A steeper yield curve, supported by firmer growth expectations and sustained wage momentum, would provide an additional structural tailwind for Japan’s financial sector, particularly through stronger net interest margins and healthier lending dynamics.

Technology—and the semiconductors that power it—is a global industry with complex supply chains that span many countries. Japan plays a crucial role in this ecosystem, with several companies dominating key niches, from specialty chemicals and materials to manufacturing equipment and critical components.

My conversations consistently pointed to strong and rising demand for semiconductors used in artificial intelligence infrastructure. Chips that support AI training and inference workloads are in particularly high demand, putting pressure on the entire supply chain. As a result, companies that control key “choke points” in the manufacturing process are benefiting from stronger visibility and improved pricing power.

Several meetings also highlighted important technology shifts that could shape the industry in the coming years. One example is the potential move toward 800-volt high-voltage direct current (HVDC) data center architecture. This approach is designed to improve energy efficiency while supporting the growing power requirements of AI systems. Another emerging trend is a shift in focus from simply making transistors faster to improving how chips communicate and work together within a system.

A final theme across many of the companies was a stronger emphasis on shareholder-friendly policies. Management teams are increasingly focused on clearer communication, more disciplined capital spending, and setting measurable targets for shareholder returns. Many are also benchmarking themselves against leading global peers as they aim to improve returns and capital efficiency.

My conversations with Japan’s industrials and automation companies consistently pointed to a sector undergoing broad‑based strengthening. End markets such as defense, power infrastructure, and factory automation are seeing clear momentum, supported by multiyear capex commitments and rising demand for higher‑specification equipment. At the same time, management teams almost universally acknowledged a cultural shift in how Japanese corporates think about capital allocation and returns. Compared with a decade ago when I first started meeting with Japanese companies, it is now uncommon to meet a company that is not actively evaluating ways to improve return-on-equity or enhance shareholder returns.

A second theme that emerged was the increasing operational discipline visible on the ground. Many companies described efforts to streamline underperforming segments, implement more dynamic pricing, or modernize production capabilities. In factory automation in particular, several management teams highlighted improving order trends across semiconductors, warehouse automation, and even previously soft areas such as automotive capex. Power‑related businesses continue to see strong demand, with grid upgrades and electrification driving sustained order flow. Defense‑linked businesses also reported robust pipelines as Japan continues to scale defense‑related spending toward its target of around 2% of GDP by fiscal year 2027.²

While some management teams demonstrated a sharper strategic focus, others appeared slower to adapt to rising competitive intensity, particularly in areas including HVAC (heating, ventilation, and air conditioning), robotics, and certain machinery categories. Overall, the on‑the‑ground takeaway was one of a sector with strengthening demand, a more returns‑oriented corporate culture, and a widening gap between companies embracing structural improvement and those maintaining the status quo.

On a recent trip to Japan, my meetings reinforced several structural themes shaping the market. Across many industries, companies are increasingly focused on restructuring, margin improvement, and shareholder returns, while several technology-linked businesses continue to benefit from the global AI and semiconductor investment cycle.

In semiconductors and related supply chains, demand tied to AI and advanced chips remains a major growth driver. A number of materials, equipment, and component suppliers highlighted strong demand for specialty materials, photoresists, and advanced manufacturing processes. Several companies are investing to support next‑generation nodes and expanding capacity for semiconductor-related products. Even where parts of the cycle remain soft, such as wafers or certain industrial segments, management teams expect AI and data center investment to drive medium‑term growth. Importantly, many firms are simultaneously restructuring legacy or low‑margin divisions to sharpen their focus on higher‑return businesses.

Consumer‑facing sectors presented a more mixed picture. Drugstore operators remain optimistic about industry consolidation and margin expansion through private label products, logistics efficiencies, and acquisitions. Discounters continue to gain share as consumers remain price sensitive, while food and consumer goods companies are raising prices to offset higher input costs and a weak yen.

Real estate remains relatively resilient, supported by tight office supply and gradual rent increases in major cities. Meanwhile, several companies across retail and consumer products noted softer traffic and lingering post‑pandemic demand normalization.

Overall, the trip reinforced a broader shift underway in Japan: companies are becoming more disciplined around profitability, restructuring, and capital allocation.

On my recent trip to Japan, meetings with companies across chemicals, industrial gases, construction, and coatings highlighted a clear divide between structurally attractive specialty niches and more challenged commodity businesses.

Within specialty chemicals, the most compelling stories are companies supplying mission‑critical materials to global technology supply chains. One company I met with derives a growing share of profits from semiconductor materials produced in a duopoly with a global peer, supplying leading chipmakers. As semiconductor investment expands, this higher‑margin segment is expected to become an increasingly important driver of earnings. I met with another diversified chemicals group that combines specialty products with repeatable earnings from domestic contracts, such as those from the Japan Ministry of Defense, creating relatively stable growth and strong balance sheets. Smaller niche players also exist in areas like flavors and fragrances, although limited scale and volatile margins make some of these businesses less attractive.

In contrast, the outlook for commodity chemicals remains challenging. Companies consistently pointed to weak industrial demand and intense competition from Chinese producers, particularly in upstream petrochemicals. In response, Japanese companies are attempting to reduce commodity exposure and shift portfolios toward specialty products. However, these transformations are complex, especially within large conglomerates, and the sector remains sensitive to oil prices and global capacity dynamics.

Beyond chemicals, construction-related businesses stood out positively. Demand is growing, driven by data center development, semiconductor fabrication facilities, urban redevelopment, and public infrastructure spending. Contractor capacity, meanwhile, remains constrained by persistent labor shortages, and the industry’s relatively limited scope for automation restricts its ability to relieve these constraints. This dynamic has translated into meaningful pricing power, further supported by recent regulatory changes that allow costs to be passed through to customers. As such, while HVAC equipment markets are becoming more competitive, HVAC installation and technical contracting are benefiting from strong demand and labor scarcity.

Elsewhere, industrial gas companies highlighted improving pricing culture in the domestic market, similar to the rest of the world, and operational efficiencies. Much like banks, these businesses benefit from the return of inflation. The low-cost, high-impact nature of their products, combined with their local‑for‑local operating model, means they face little competition from imports, giving them strong pricing power. Demand is also being supported by the increasing use of industrial gases in advanced semiconductor manufacturing, a sector that is expanding in Japan.

Based on my meetings with Japanese telecom, consulting, and software companies, a few consistent themes emerged around pricing, AI adoption, and competitive positioning.

Among telecom operators, which are domestically focused, pricing discipline is gradually returning to the market after years of intense competition. Several operators raised mobile prices over the past year without seeing a significant increase in churn, suggesting the sector may be entering a period of modest average-revenue-per-user growth. One operator I spoke to in particular could benefit from both pricing tailwinds and subscriber gains as competitors adjust pricing and roaming agreements change. However, some companies’ balance sheets remain stretched, and network quality will be closely watched as temporary roaming arrangements expire.

In consulting and IT services, companies are still grappling with how AI will affect their business models. Most firms believe simple coding or repetitive work could be automated but argue that complex transformation projects will still require human consultants. Some companies are beginning to partner with large AI platforms and deploy generative AI internally for projects, suggesting there may be near‑term demand for IT services tied to AI adoption. However, talent shortages remain a constraint for smaller consultancies attempting to scale.

Across cloud-based software providers, AI disruption is a major concern. Many SME‑focused software providers are accelerating AI‑enabled features and automation tools, but some struggled to clearly articulate durable competitive advantages. Rising sales and marketing costs and slowing growth in some niche software-as-a-service categories also suggest intensifying competition as the sector matures.