Why Iran Conflict Lifted Japanese Defense Stocks 25%
(Bloomberg Opinion) -- Shots have been fired in the Middle East. Whether the feud escalates or not, Japan’s defense companies may have found the catalyst they needed.
Stock prices of Japanese machinery makers that also produce assault rifles, flare bombs and other military equipment surged as much as 25% Wednesday, after Iran fired rockets at two U.S. bases in Iraq in response to the American attack that killed General Qassem Soleimani. Iran’s foreign minister said his country wasn’t seeking escalation, and President Donald Trump refrained from immediately threatening retaliation.
Such price movements in defense-related stocks have happened before, when tensions worsen on the Korean Peninsula or military conflicts heat up. They often don’t last. This time, the rise could last longer as it coincides with the industrial cycle showing an upturn after a year of downbeat data and uncertainty.
In China, a big demand driver for Japan’s machinery manufacturers, industrial profits rose 5.4% in November with production activity picking up after dropping for most of 2019. Excavator shipments are growing, and orders from large Chinese construction companies rose up to 25% in the nine months to September, compared with 1% to 9% percent in all of 2018. Industrial robot production increased 4% from a year earlier.
While machine tool orders in Japan have been dropping, a survey in December showed that the sector’s builders association was optimistic going into the new year and expected a recovery. Aeronautics-related orders from France, for instance, rose in November, while machinery maker Fanuc Corp.’s export volumes turned around.
Certainly, several parts of the industrial cycle are moving at different speeds. But overall, companies are emerging from their deep crisis of confidence. Those with military-related segments are helped by Tokyo expanding defense spending under a five-year procurement plan. That benefits them and the longstanding alliance with Washington.
While larger Japanese companies help the likes of Lockheed Martin Corp. with maintenance and repair, smaller ones often struggle to find a foothold. Japan is working to bolster this part of the supply chain and boost exports. The U.S. has $20.7 billion in active government sales and permanent exports of almost $14.9 billion in defense articles such as gas turbine engines, missile vehicles and rockets to Japan.
While Japan maintained stringent controls on arms exports until five years ago, it has partnered with the U.S. and its companies in other ways. Under a special agreement, Japan helps offset the cost of around $2 billion for American troops stationed there.
Time will tell whether Trump’s conflict with Iran has legs, but the rally in Japan’s machinery stocks may run a while longer.
To contact the editor responsible for this story: Patrick McDowell at pmcdowell10@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.
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