Make Defense Industry Great Again!
Chart of the Week:
Takaichi Dissolves Parliament; Japanese Equities Poised to Benefit
Japan’s Prime Minister Sanae Takaichi announced on January 19 that she will dissolve Parliament on January 23, with voting for the House of Representatives scheduled for February 8. She aims to leverage her cabinet’s high approval ratings to move beyond the coalition’s current narrow majority and expand seats for the LDP and Japan Innovation Party, thereby reducing potential internal and external resistance to her fiscal expansion agenda.
Market Recap 1:
Greenland Tensions Briefly Strained U.S.–Europe Relations and Weighed on Equities; Sector Rotation Signs Emerge
Trump’s push to acquire Greenland triggered opposition from several European countries. During the dispute, he even announced a plan to impose a 10% tariff on imports from eight opposing European nations starting February 1. In response, the European Parliament moved to suspend approval of the U.S.–EU trade agreement and discussed potential retaliatory measures. The escalating confrontation stirred market fear, driving most global equity markets lower. Fortunately, the U.S. and NATO reached a framework agreement on Greenland during the World Economic Forum in Davos, after which Trump withdrew the tariff threat and ruled out military action. Although markets rebounded as concerns eased, most indices failed to fully recover prior losses, resulting in a weak week-to-date performance.
Market Recap 2:
Longer-Term Yields Rebound, Dragging Bond Prices Lower; Gold Prices Continue to Rise
Japan announced an early general election, and the ruling Liberal Democratic Party is expected to benefit from Prime Minister Sanae Takaichi’s strong approval rating, potentially expanding its seats in the House of Representatives and lowering obstacles to implementing fiscal stimulus. Investors, however, worry that Japan’s long-term debt burden may intensify, triggering a sell-off in 10-year JGBs. The selling pressure even spilled over into U.S. and European sovereign bond markets. In addition, diverging U.S.–EU positions on the Greenland issue raised concerns about a renewed trade war, further pushing government bond yields higher and weighing on the bond market. Although the U.S. and NATO later reached a framework agreement and yields retreated from their highs, bonds were still mostly down for the week.
What’s Trending:
China Meets Economic Targets, High-Tech Expected to Drive Growth This Year
China’s real GDP grew 4.5% year-on-year in the fourth quarter, a slowdown of 0.3 percentage points from the third quarter, but the growth rate was in line with market expectations. Full-year 2025 GDP also achieved the government’s 5% target, with the contribution of net exports remaining stable.
In Focus 1:
Rising Geopolitical Turbulence as Trump Intensifies Actions Early in the Year
The global shock from Trump’s lightning capture of Nicolás Maduro and the U.S. takeover of Venezuela’s oil transportation has yet to subside, and it was immediately followed by military threats toward Iran. Almost simultaneously, U.S. pressure on Greenland escalated rapidly. Although Trump later ruled out military action and withdrew tariff threats, these events have all driven a significant rise in recent geopolitical risk indicators.
In Focus 2:
Defense Industry Profit Growth Remains Strong, Continues to Outperform the Broad Market
Since returning to office, President Trump has repeatedly emphasized that U.S. allies — including Europe, Japan, and Taiwan — must take on greater responsibility for their own defense rather than overly relying on U.S. military power, in order to reduce the burden on American forces. Many countries have already begun increasing their defense budgets, which is expected to translate into real demand for the U.S. defense industry going forward.
