(Feb 7): A heightened sense of risk and opportunity is building in Japanese markets on Friday, as Prime Minister Shigeru Ishiba prepares for his first meeting with US President Donald Trump.

Defence, energy and AI-related stocks are in focus amid speculation that they may see further gains, and while investors see the auto sector in the firing line, the less that is said about tariffs during the meeting, the better it will be for these key exporters.

The yen, which has moved higher this week, is vulnerable to increased volatility, as investors try to work through the implications for both trade and inflation of levies Trump imposes on imports to the US.

Japan has so far stayed out of the cross hairs of Trump’s wide-ranging tariff threats, providing some reason for optimism. But worries over Japan’s trade surplus with the US linger, and Ishiba is going into Friday’s meeting with far less diplomatic experience than former prime minister Shinzo Abe, who was credited with managing Trump well, but was still unable avoid tariffs over steel and aluminium.

“Ishiba will want to explain to Trump that Japan is not actively keeping its currency weak to expand its trade surplus,” said Rajeev De Mello, a global macro portfolio manager at Gama Asset Management SA in Singapore, who is keeping a close eye on the auto and pharmaceutical industries.

Phillip Wool, the head of portfolio management at Rayliant Global Advisors Ltd in Hong Kong, said if the meeting is more of a “bonding session between the two leaders”, energy and defence may take centre stage.

Here’s a closer look at some of the market areas to watch:

Defence-related companies such as IHI Corp, Mitsubishi Heavy Industries Ltd and Kawasaki Heavy Industries Ltd have been among the best performers on the Nikkei 225 measure over the past year.

“Should Japan commit to higher military spending or additional US equipment purchases, companies like Mitsubishi Heavy Industries could gain,” said Dilin Wu, a research strategist at Pepperstone Group Ltd.

AI expenditure is another area of focus for Trump, with his multibillion-dollar Stargate venture that will be led by ChatGPT developer OpenAI, Japan’s SoftBank Group Corp and software giant Oracle Corp.

Alex Stout, a global equity analyst at River Global Investors LLP, expects companies such as Hitachi Ltd to benefit from energy transmission linked to AI.

Ishiba has said he will ask Trump for a stable supply of energy, and this may include shale gas imports to Japan, according to the Nikkei.

“The issue of LNG (liquefied natural gas) will be raised, and that has potential to be a positive for Japan,” said Hiroshi Namioka, the chief strategist and fund manager of T&D Asset Management Co. 

Japan is reportedly weighing investment in a new gas pipeline in Alaska, which would be a plus for electricity providers by helping to diversify supply, Namioka said. “If the energy talks go well, I expect we will see electricity stocks rise.”

Shares of shippers involved in LNG would also likely gain, he said.

Trade issues put the spotlight on carmakers, which supply the US market from factories in Japan, Canada, Mexico and the US itself. One taste of the potential stock moves came on Monday, when auto firms including Toyota Motor Corp lost 5%, after Trump signalled 25% tariffs on Canada and Mexico. They bounced back over the next few days after he shifted his position.

“If Trump takes a hard-line stance on Japanese imports into the US, Japanese automakers could be among those in the firing line,” said Tim Waterer, the chief market analyst of KCM Trade.

Traders are also watching Ishiba and Trump’s talks for any comments on Nippon Steel Corp’s proposed takeover of US Steel Corp, which was blocked by then-president Joe Biden in January. Trump met US Steel chief executive officer Dave Burritt at the White House, officials familiar with the matter said, one day before the meeting with the Japanese prime minister. 

Trump has in the past accused Japan and China of devaluing their currencies. That has put the foreign exchange market on tenterhooks for any comments that may steer the yen. 

“The yen market seems to be travelling with a degree of optimism that Japan could be spared tariffs,” said Ray Attrill, the head of foreign-exchange strategy at National Australia Bank Ltd. That said, “the mood music vis-a-vis tariffs coming out of the meeting could move the yen one way or the other.”

Yukio Ishizuki, a senior currency strategist at Daiwa Securities Co, cautioned Ishiba’s visit to the US risks “stirring up a hornet’s nest”. 

“With trade being a hot topic around the world, it is only natural that President Trump will raise the issue of the trade deficit with Japan,” Ishizuki said. 

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