Japan's growth strategy focuses on 17 strategic industries, with AI and economic security themes heating up

Overview

This issue of Japan Weekly Kickstart focuses on the Japanese government's latest growth strategy. The strategy includes a public-private investment plan of about US$2.3 trillion, covering 17 strategic industries, with core themes including AI, semiconductors, defense, aerospace, shipbuilding, critical materials, energy security, biomanufacturing, food tech, and content. The report also discusses the Japanese government's goal of raising the share of stocks, investment trusts, and bonds in household financial assets to 40% by 2040, as well as the impact of retail and overseas capital flows on the Japanese equity market.

Core views

The report's core view is that Japan's policy agenda is elevating economic security, autonomous supply chains, and AI-era infrastructure to greater importance, so AI, defense, shipbuilding, semiconductors, and other economic security-related themes may regain investor attention. At the same time, the policy goal of shifting household assets from cash deposits to risk assets, growth in NISA purchases, and more stock splits may all improve participation and liquidity in the Japanese equity market. Goldman Sachs maintains a constructive target on TOPIX, with a 12-month target of 4,400.

Analysis framework

The report assesses the Japanese equity market through a combination of policy interpretation, fund flows, market performance, valuation, earnings revisions, and thematic basket performance. The policy section reviews 17 strategic industries and priority products/technologies; the flow section compares net buying and selling by overseas investors, individuals, and domestic institutions; the market section tracks TOPIX, sector and thematic indices, equal-weight baskets, 52-week performance, valuations, and earnings revisions.

Methodology notes

• 股票策略Japan Weekly Kickstart liquid universe

  Liquid Japanese equity sample universe

  The report's sector and thematic performance analysis covers Japanese stocks with average daily trading value above US$20 million over the past six months. As of December 17, 2025, the sample universe consisted of 271 stocks and is refreshed annually.

• 主题指数Equal-weighted sector and thematic indices

  Equal-weighted sector and thematic indices

  Goldman Sachs divides the liquid Japanese equity sample into 45 equal-weight indices covering MSCI sectors, subsectors, and cross-sector themes; constituent selection is based on MSCI definitions, quantitative indicators, and/or the views of Goldman Sachs equity analysts.

• 市场宽度Best-Worst spread

  Performance spread between the best and worst constituents

  Best-Worst spread is used to measure the gap between the best-performing and worst-performing constituents within each index, in order to observe internal dispersion within a theme or sector.

• 盈利动量Earnings forecast revision index

  Earnings forecast revision index

  The earnings forecast revision index equals the number of analyst upgrades over the past month minus the number of downgrades, divided by the total number of forecasts.

Asset mapping & comparison

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

• TOPIX

  Core index of the Japanese equity market and carrier of the strategy target

  Strengths

  Goldman Sachs provides 3-month, 6-month, and 12-month targets of 4,100/4,200/4,400, indicating remaining target upside over the medium term.

  Weaknesses

  TOPIX fell 2.0% during the week in the report, showing that short-term market volatility remains present.

  Comparison

  Relative to overseas indices, Goldman Sachs' 12-month TOPIX upside target is 11%, below MXAPJ's 20% and close to the S&P 500's 13%.

  Risks

  Yen assumptions, earnings forecast revisions, changes in overseas fund flows, and the pace of policy implementation may all affect achievement of the targets.

• AI Beneficiaries

  Thematic basket catalyzed by Japan's 17 strategic industries and the Physical AI theme

  Strengths

  Up 263% over 52 weeks and 93% year to date, showing strong medium- to long-term thematic momentum.

  Weaknesses

  1-week performance is -4%, suggesting possible short-term profit-taking.

  Comparison

  Performance is stronger than most traditional defensive industries, but so are volatility and valuation sensitivity.

  Risks

  Theme crowding, weaker-than-expected earnings realization, and a slowdown in global AI capital expenditure.

• Defense

  Theme related to economic security and new warfare technologies

  Strengths

  The government strategy emphasizes drones, dual-use technologies, and supply autonomy, with clear policy support.

  Weaknesses

  The table shows defense theme performance of -4% over 1 week, -8% over 1 month, and -11% over 3 months, indicating recent weakness.

  Comparison

  Compared with AI and electronic components, short- and medium-term price momentum is lagging.

  Risks

  Budget execution pace, order realization, and gaps between valuations and policy expectations.

• Shipbuilding screen

  Economic security theme related to oceans, maritime activities, and next-generation vessels

  Strengths

  The strategic document emphasizes next-generation vessels, marine unmanned equipment, and supply-chain autonomy, which may support attention on the shipbuilding industry.

  Weaknesses

  The report does not provide full single-stock ratings or earnings estimates, so theme implementation still requires further validation.

  Comparison

  Like defense, it belongs to the economic security theme, but its drivers are more tied to supply chains, maritime security, and industrial competitiveness.

  Risks

  Cyclical order volatility, rising costs, and uncertainty in policy execution.

• 家庭风险资产配置

  Policy target for the share of stocks, investment trusts, and bonds in household financial assets

  Strengths

  If the 40% target for 2040 advances, it will expand the long-term funding base of Japan's capital markets.

  Weaknesses

  The current share is about 25%, the path upward is long, and Japanese households still maintain a high share of cash deposits.

  Comparison

  The 40% target is close to Europe, but still below the US at about 60%.

  Risks

  Insufficient household risk appetite, market drawdowns, and inadequate tax or institutional incentives.

Key data

• Public-private investment plan sizeAbout US$2.3 trillionJapan's government growth strategy covers 17 strategic industries.
• Household financial asset targetRaise the share of stocks, investment trusts, and bonds to 40% by 2040Currently about 25% in 1Q26; the 40% target is close to Europe but below the US at about 60%.
• Stock splitsYTD count about +40% YoYThe report believes rising share prices have driven an increase in stock splits.
• NISA purchasesMay purchase amount +57% YoYThe largest YoY increase since December 2024; at least 41% of January-May NISA purchases involved Japanese domestic equities.
• June 15-19 fund flowsOverseas investors net bought about JPY 1 trillion; individuals net sold about JPY 470 billion; domestic institutions net sold about JPY 634 billionData from the Tokyo Stock Exchange.
• TOPIX targets3-month 4,100; 6-month 4,200; 12-month 4,400Based on about 3,963 points, implying target upside of about 3%, 6%, and 11%.
• Weekly performance of TOPIX and NK225TOPIX 3,963.36 (-2.0%); NK225 69,360.88 (-2.7%)Weekly market summary on the report cover.
• Thematic performanceAI Beneficiaries 52-week +263%, YTD +93%; Information Technology 52-week +192%, YTD +79%The table shows that AI and tech-related themes have strong medium- to long-term performance, though they pulled back on a weekly basis.

Impact & implications

On the policy side, the 17 strategic industries make economic security, supply-chain autonomy, and AI infrastructure key priorities of Japan's industrial policy, which may raise attention on capital expenditure, order expectations, and valuations for related industries. On the market side, the household asset allocation target and growth in NISA purchases help expand the long-term funding base for Japanese equities, but in the short term it remains necessary to watch whether net selling by individuals and domestic institutions continues to be offset by overseas buying. From an investment perspective, economic security, AI, semiconductors, defense, and shipbuilding themes have policy catalysts, but some themes have already risen substantially over the past year, so investors need to watch valuation, earnings revision, and crowding risks.

Risks

• There is a time lag between policy strategy announcements and actual realization in capital expenditure and corporate earnings.
• AI, semiconductors, and high-growth themes have already risen substantially, so if earnings or orders fall short of expectations, valuation correction risk will be high.
• Net buying by overseas investors has been an important recent support; if flows reverse, index volatility may be amplified.
• Individuals and domestic institutions are still net sellers, and the migration of Japanese household asset allocation may not occur linearly.
• FX assumptions have an important impact on TOPIX earnings forecasts and foreign investor behavior; the report uses FY26-FY28 USD/JPY assumptions of 157/154/150.
• The liquidity thematic baskets are based on samples of highly liquid stocks and may not represent the performance of all listed Japanese companies.

What to watch

• Follow-up budgets, subsidies, procurement, and regulatory details for Japan's 17 strategic industries.
• Orders, earnings revisions, and capex guidance from companies related to AI, semiconductors, defense, shipbuilding, and energy security.
• Whether NISA purchase amounts, domestic retail participation, and the number of stock splits continue to rise.
• Net buying and selling direction of overseas investors, individuals, and domestic institutions on the Tokyo Stock Exchange.
• TOPIX's path relative to the 4,100, 4,200, and 4,400 targets.
• The yen exchange rate, global risk appetite for tech stocks, and Japan's corporate earnings revision index.