This episode is recorded live from the Morgan Stanley and MUFG Japan Summit. The discussion centers on Morgan Stanley Research’s newly published midyear macro outlook, mapping global energy pressures onto regional equity structures.
Host & Moderator: Seth Carpenter (Global Chief Economist and Head of Macro Research)
Featured Panelists:
Chetan Ahya (Chief Asia Economist)
Takeshi Yamaguchi (Chief Japan Economist)
Jonathan Garner (Chief Asia and EM Equity Strategist)
Acknowledged Contributors: Kuichi Sugisaki (Head of Japan Macro Strategy), Show Nakazawa (Japan Equity Strategist).
1. Global Macro: The Energy Shock Cushion
[]() Forecasting Challenges and Baseline Scenarios
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Seth Carpenter highlights that this midyear forecasting cycle—covering the outlook for the next year and a half to two years—was one of the most difficult in recent memory due to dramatic swings and volatility in oil prices. Because of these rapid shifts, the macro research team dedicated significant effort toward constructing alternative scenarios and stress-testing ways their baseline forecast could be wrong.
While Asia remains one of the world's most structurally exposed regions to energy shocks, outright physical supply shortages have been successfully averted due to massive macroeconomic supply-demand realignments:
US Export Surge: US exports increased dramatically by 3.8 million barrels per day (bpd).
Chinese Demand Reduction: Concurrently, China reduced its imports by 3.5 million barrels per day.
The Net Impact: These shifting variables created a total 7 million barrel swing relative to global oil consumption, which sits at roughly 100 million barrels per day, stabilizing physical global balances.
The Gas Bailout: Asia’s high vulnerability to Middle Eastern gas dependencies was single-handedly eased by China, which slashed its own natural gas imports by 45%. This major supply pullback avoided the physical gas shortages that Morgan Stanley's team initially feared, noting that while oil prices can be managed, structural shortages are far more difficult to navigate.
Fuel Switching: Within the region, major economies shifted to alternative fuels. China and India—the two largest fuel importers in the region—switched to electricity generated through domestic coal and renewable sources.
Fiscal Burden Over Consumer Pass-Through: On average across the region, only 25% to 30% of the underlying fuel price increases have been passed through to the end consumer.
Macroeconomic Impact: Governments are absorbing the primary price shock on state balance sheets. While this creates a rising fiscal burden, it has successfully prevented a sharp spike in consumer inflation across Asia, keeping household demand intact.
2. Japan Macro: Near-Term Pauses vs. Structural Reflation
Takeshi Yamaguchi, an early adopter of the structural Japan reflation thesis, notes that while long-term economic fundamentals remain resilient and nominal GDP recovery continues as a trend, Japan faces a short-term economic slowdown this year across both real and nominal GDP.
Producer Inflation Spike: Driven by high oil prices and severe secondary supply-side disruptions, Japan's April Producer Price Index (PPI) jumped to 4.9% YoY.
Specific Disruptive Segments: Supply constraints are heavily concentrated in Naphtha-related materials, specifically impacting construction materials, plastic products, and industrial solvents.
Consumer Mitigation: Direct negative impacts on households have been strictly limited, insulated by active government energy subsidies and Japan's relatively large strategic oil reserves.
The long-term baseline reflation story remains unchanged despite these short-term shocks. Yamaguchi targets a significant macro acceleration next year, forecasting above 4% nominal GDP growth (contrasting with the slightly negative nominal growth expected this year due to terms of trade losses). This trend is anchored by:
Demographic Wage Support: Severe structural labor shortages mean that while overall wage growth might experience mild slowing, a solid "base up" wage increase will continue next year, especially among younger workers.
Capital Expenditure Resilience: Tight labor markets are directly forcing Japanese corporations to accelerate labor-saving investments. Coupled with government initiatives for domestic sourcing, domestic capital expenditure (capex) is expected to remain highly resilient.
In their midyear outlook, Jonathan Garner outlines a high-conviction tactical preference for Japanese equities over broader Emerging Markets (EM). The allocation strategy is entirely dictated by a global corporate capex super cycle:
The Geographic Split: Morgan Stanley's global portfolios are positioned Overweight capital spending and Underweight the consumer.
Structural Composition: This strategy directs capital away from South Asian markets—which are predominantly populated by consumer and services companies—and heavily concentrates capital into North Asian markets, with Japan being richly endowed with corporate beneficiaries of this capex cycle, alongside South Korea and Taiwan.
The EM Earnings Deficit: Garner highlights a severe structural divergence within broader emerging markets: if you strip South Korea and Taiwan completely out of the EM index, there is zero net earnings growth across EM right now.
TOPIX Index Target: Backed by analysis from equity strategist Show Nakazawa, Morgan Stanley maintains a base-case TOPIX target of 4,300, representing approximately 12% upside from the time of their report's publication. In the two weeks following publication, EM equity markets fell back further, leaving roughly an 8% upside to Morgan Stanley's EM targets. On a risk-adjusted bull-bear skew, Japan remains the preferred core allocation.
Thematic Alignments: Citing research by colleague Daniel Blake, Garner notes that Morgan Stanley's four core secular research themes map into 75% by stock number of their total Japanese equity coverage. This structural distribution is superior to any other major global equity market:
Multipolar World Dynamics (Supply chain localization)
AI & Technology Diffusion (Upstream hardware/software deployment)
Future of Energy Infrastructure
Societal Shifts (Demographic automation)
Global Structural Advantages: Garner notes that Europe largely lacks the upstream beneficiaries of AI tech diffusion, while the US market is heavily exposed to consumer segments and legacy software service business models.
Garner flags an unprecedented level of earnings revision dispersion within the Japanese and broader Asian equity markets, illustrating a bifurcated corporate landscape:
Consumer Friction: Corporate earnings numbers are highly challenged for large automotive Original Equipment Manufacturers (OEMs) in Japan. Across the market, all six distinct subcomponents of the consumer sector tracked by Morgan Stanley are facing universal earnings downgrades, questioning the near-term resilience of consumer spending.
B2B Capex Upgrades: Conversely, aggressive corporate earnings upgrades are concentrated in upstream sectors: across the board in semiconductors, IT systems, tech hardware, materials, and the defense capital goods space. Garner notes he has never seen this extreme degree of revision dispersion before.
Capital Group: 2026 Midyear Outlook | 16 July 2026
1. Executive Briefing TL;DR The Core Thesis: The 2026 mid year macroeconomic landscape exhibits resilient trend GDP growth of approximately 2%, driven primarily by an unprecedented artificial intelligence capital expenditure boom and robus…