Japan IT and software demand remains solid, but Morgan Stanley expects share-price recovery to follow earnings growth.

Overview

This Japan IT and software outlook argues that underlying demand remains healthy into late 2026 and 2027, but sector returns have lagged. Morgan Stanley expects share prices to recover alongside profit growth and frames stock selection around AI-enabled productivity, cloud and DX demand, recurring-revenue expansion, operating leverage and company-specific execution.

Core views

Morgan Stanley maintains an In-Line view on Japan IT & Software. Its central conclusion is that demand is solid, yet the sector has underperformed; therefore, the expected recovery in share prices should be tied to delivered profit growth rather than demand alone. The report evaluates domestic IT services and software companies through earnings forecasts, valuation comparisons and sector data, with market data and valuation comparisons based on 14 September 2026 closing prices. The industry backdrop is supported by continuing DX, cloud migration, legacy-system modernization and labor-saving demand. BoJ Tankan data cited in the report show forecast FY3/26 software-investment growth of 12.2% for all industries and all company sizes, with manufacturing at 13.1% and non-manufacturing at 11.7%. The report also points to a longer-term improvement in information-service profitability: JISA data show average operating margin rising to 10.7% in FY3/25 from 7.7% in FY3/16, while average headcount spending as a share of revenue fell to 25.4% from 28.0%. Generative AI is a recurring mechanism across the coverage universe. For IT services, it can reduce development hours, improve software quality, enable more high-value consulting and platform offerings, and support margin expansion. NS Solutions is shifting from labor-hour dependency toward a TAM-based, higher-value model using generative AI, asset reuse and platforms; it targets an operating margin of around 20% over the medium to long term. TIS aims for a 50% productivity improvement through AI-centric development. NRI, NEC and Fujitsu are applying AI across development, customer transformation and operations, while cybersecurity vendors use AI for threat detection, analysis and response. For SaaS companies, the report links AI to product value, ARPU, automation and retention. RAKUS is using generative AI features in core products and seeks ARPU expansion; Money Forward is embedding AI agents in accounting, expense-management and HR offerings; Sansan positions proprietary customer and activity data as AI-era data infrastructure; freee is shifting from SaaS used by people toward AI-enabled task execution. These opportunities coexist with execution demands: client acquisition, ARR growth, pricing, product cross-selling, profitability and progress toward medium-term plans. Coverage-level forecasts show differing growth and valuation profiles. The coverage summary assigns Overweight ratings to NRI, NEC, Fujitsu, Otsuka and OBIC Business Consultants, with price targets of ¥6,000, ¥6,000, ¥5,000, ¥4,500 and ¥10,000 respectively. It assigns Underweight to NS Solutions, with a ¥3,500 target, and Trend Micro, with a ¥5,000 target. Equal-weight names include TIS, SHIFT, RAKUS, Money Forward, Appier, Sansan, freee, OBIC, Oracle Japan and Baycurrent. The report's estimates show high revenue and earnings growth for several software companies, but it does not treat high growth as sufficient without proof of margins, monetization and valuation support. The report identifies differentiated company setups. NS Solutions is supported by manufacturing-centered DX demand, order backlog and a higher-value model, but the report watches profitability, order intake, the TAM-based transition, AI targets and Nippon Steel's ownership stake. TIS is positioned for financial IT, legacy modernization and recurring cloud services, with recruitment, utilization, unprofitable projects and AI productivity central to execution. SHIFT retains growth drivers in engineers, pricing and customer acquisition, but slowing growth, higher SG&A and limited room for gross-margin expansion have made its valuation more conservative. Among SaaS and internet-software names, RAKUS benefits from expense-management leadership, invoice-SaaS growth and pricing competitiveness. Money Forward has expansion opportunities in cloud back-office processes, SaaS-finance services and non-accounting products, but faces profit-turnaround, competition and digitalization risks. Appier is positioned for growth through proprietary AI algorithms and improved campaign ROI, although the report flags high reliance on a single customer. Sansan's leading contact-management franchise and Bill One growth support the thesis, while risks include slower Sansan growth and a delayed Bill One move into profitability. For larger IT services and software platforms, NRI's financial platforms, cybersecurity capabilities and end-to-end services are presented as difficult to replicate. OBIC is supported by cloud ERP, large-enterprise expansion, vertical integration and high margins. Trend Micro's transition to the Vision One subscription model is intended to support medium- to long-term growth and margins, although overseas revenue creates foreign-exchange and macro sensitivity and the transition may carry short-term costs. Oracle Japan is positioned to capture cloud-core-system migration and AI infrastructure demand while preserving high margins. NEC and Fujitsu are framed around high-value DX, modernization, AI-native transformation, security and infrastructure opportunities. Baycurrent's growth depends on consultant expansion, utilization and billing rates, while BIPROGY seeks higher value-added services and improved margins through DX and new business models.

Analysis framework

Morgan Stanley combines sector demand indicators from JISA and the BoJ Tankan with company-level earnings forecasts, operating KPIs, order and backlog data, valuation comparisons and stated catalysts. It assesses how DX, cloud migration, AI adoption, recurring revenue, pricing and productivity translate into revenue growth, operating margins and earnings, then differentiates names by rating, target price, valuation and execution risks.

Methodology notes

• Industry AnalysisSupply-demand framework

  Assessment of DX, cloud, modernization and software-investment demand against companies' capacity, hiring, utilization and delivery execution.

  The report uses sector demand data and company operating indicators to judge whether demand can translate into revenue and profit growth.

• Industry AnalysisVolume-price decomposition

  Revenue growth is assessed through customer additions, ARR, ARPU, pricing, consultant headcount, utilization and billing rates.

  This separates volume or customer growth from pricing and productivity effects, especially for SaaS and IT-services companies.

• Valuation methodsP/E and PEG Valuation

  Forward P/E is compared across domestic and overseas IT and software peers.

  The report uses forward earnings multiples alongside growth forecasts to contextualize relative valuation.

• Valuation methodsEV/EBITDA valuation

  Forward EV/EBITDA is included in coverage and peer valuation comparisons.

  This provides a profit-based comparison across companies with different capital structures and growth profiles.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Nomura Research Institute (4307)

  Overweight; financial platforms, cybersecurity and AI-enabled end-to-end services support the thesis.

  Strengths

  Recurring platform revenue, high switching costs, financial IT expertise and differentiated security services.

  Risks

  Progress toward the medium-term plan and overseas restructuring.

• NEC (6701)

  Overweight; positioned for DX, AI-native transformation, social infrastructure and national-security demand.

  Strengths

  Technology assets in AI, biometrics and security; BluStellar and critical-infrastructure capabilities.

  Risks

  Order growth and profitability in BluStellar and national-security businesses.

• Fujitsu (6702)

  Overweight; modernization, UVANCE and AI-driven delivery support growth and margin expansion.

  Strengths

  Large engineering workforce, end-to-end IT capabilities and legacy-system expertise.

  Risks

  Execution in UVANCE and modernization businesses.

• NS Solutions (2327)

  Underweight; DX and AI-led business-model transformation support earnings, but the rating remains Underweight.

  Strengths

  Manufacturing DX exposure, order backlog and higher-value service ambitions.

  Weaknesses

  Transition away from labor-hour dependency remains an execution requirement.

  Risks

  Order intake, profitability, TAM-model progress, AI targets and changes in Nippon Steel's ownership stake.

• Trend Micro (4704)

  Underweight; subscription transition and cybersecurity AI opportunities are offset by transition and external risks.

  Strengths

  Strong Japan market position, brand and AI-enabled cybersecurity capabilities.

  Weaknesses

  Subscription transition may entail short-term costs.

  Risks

  Foreign-exchange and macroeconomic fluctuations due to overseas revenue exposure.

• Money Forward (3994)

  Equal-weight; cloud back-office and SaaS-finance expansion offer upside.

  Strengths

  Major ERP and cloud-accounting position; growth opportunities beyond accounting.

  Weaknesses

  Profitability remains a key execution issue.

  Risks

  Delayed profitability, intensifying price competition, slow new-business progress and slower Japanese digitalization.

• Appier Group (4180)

  Equal-weight; proprietary AI algorithms are expected to improve campaign ROI and support growth.

  Strengths

  Internet advertising platform and industry-specific AI models.

  Weaknesses

  High customer concentration.

  Risks

  High reliance on a single customer.

• Sansan (4443)

  Equal-weight; leadership in contact-management DX and Bill One growth provide upside.

  Strengths

  Large market share, proprietary data and expansion into contract DX.

  Weaknesses

  Bill One profitability remains unproven.

  Risks

  Slower Sansan growth and delayed Bill One profitability.

Key data

• Japan IT & Software industry viewIn-LineMorgan Stanley's industry view for the coverage universe.
• FY3/26 software investment growth, all industries12.2%BoJ Tankan estimate for all company sizes.
• FY3/26 software investment growth, manufacturing13.1%BoJ Tankan estimate.
• FY3/26 software investment growth, non-manufacturing11.7%BoJ Tankan estimate.
• JISA average operating margin10.7%FY3/25, versus 7.7% in FY3/16.
• JISA average headcount spending/revenue25.4%FY3/25, versus 28.0% in FY3/16.
• NS Solutions medium- to long-term operating-margin aimaround 20%Linked to high-value projects, productivity and revenue-model transformation.
• TIS AI-centric development productivity target50% improvementCompany target cited by the report.

Impact & implications

The report expects industry returns to depend on earnings delivery. It favors businesses that can turn persistent DX and AI demand into recurring revenue, pricing, utilization gains and margin expansion, while highlighting that hiring, profitability, competition, product transitions and AI monetization remain decisive at the company level.

Risks

• Money Forward: delayed profitability, intensifying price competition, slower new-business expansion and slower-than-expected Japanese digitalization.
• Appier: high reliance on a single customer.
• Sansan: a slowdown in Sansan growth or a delayed Bill One move into profitability.
• Trend Micro: foreign-exchange and macroeconomic exposure from overseas revenue, plus short-term costs in the subscription transition.
• SHIFT: slower growth, rising SG&A, limited gross-margin expansion and uncertainty over its native-AI transition.

What to watch

• Quarterly revenue, operating profit, growth rates and margin expansion across covered companies.
• Order intake and backlog, particularly for IT-services companies.
• Engineer hiring, utilization, billing rates and recruitment efficiency at labor-intensive service providers.
• SaaS client additions, ARR, ARPU, churn, cross-selling and progress toward profitability.
• Evidence of AI revenue, ARR or P&L contribution rather than product announcements alone.
• Progress in cloud migration, modernization, subscription transitions and medium-term management plans.