Thoughts on the Market

Our Japan Financials Analyst Mia Nagasaka explains why a once-in-30-year investment cycle could transform corporate financing and open a new chapter for Japanese banks.
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Welcome to Thoughts on the Market. I’m Mia Nagasaka, Head of Japan Financials Research at Morgan Stanley MUFG Securities.
Today – a once-in-30-year investment cycle is changing how investors think about Japanese banks.
It’s Tuesday, October 6th, at 10am in Tokyo.
For decades, Japanese companies had more cash than investment opportunities. But now it's changing.
This marks a new chapter for Japanese banks. The first stage of recovery was largely about interest rates. As Japan moved away from negative rates, higher lending yields helped bank margins and earnings.
This next stage is about growth in the banking business itself, driven by companies investing more and needing more external capital.
In fact, we think Japan is entering its first meaningful capex cycle in nearly three decades. Investment needs are broadening, from labor-saving technology to the replacement of aging equipment. Companies are also becoming more active in reallocating capital toward businesses where they see stronger returns.
For banks, the most direct opportunity is lending. We expect Japan’s domestic loan market to grow from about 588 trillion yen, or roughly 3.7 trillion U.S. dollars, in the fiscal year ending March 2026 to roughly 712 trillion yen, or about 4.5 trillion dollars, by March 2031. Loan growth could run at around 5 percent annually early in the investment cycle, then settle at about 3 to 4 percent.
And the financing opportunity extends beyond loans. Take Japan’s debt capital markets, where companies raise money by issuing bonds. We expect them to grow from about 52 trillion yen, or roughly 331billion dollars, to 63 trillion yen, or about 401 billion dollars, by March 2031. We also forecast the M&A market to rise from 23 trillion yen, or roughly 146 billion dollars, to 32 trillion yen, or about 204 billion dollars, over the same period. Large projects often need several forms of financing, so lending can open the door to underwriting and advisory fees as well.
This gives banks more ways to generate earnings. In the early phase, banks can benefit mainly from lending and project finance. As projects mature, fee-based businesses such as capital markets and M&A can contribute more. This makes the opportunity look less like a short-lived lending boom and more like a multi-stage financing cycle.
The key measure to watch is return on equity, which shows how effectively a bank turns shareholder capital into profit. Japan’s megabanks are currently generating ROEs of roughly 10 to 11 percent. We see a path toward around 15 percent over the medium term. Structural growth in corporate financing demand alone could add about 1 to 1.5 percentage points.
So, the bigger story is not simply that rates have risen. Japan may be moving from an economy defined by excess savings and underinvestment toward one where companies need capital to grow. If that transition continues, banks could have substantially more productive opportunities to deploy their balance sheets.
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Recent headlines about Canada have focused on trade uncertainty and weak productivity. But our Global Economist Arunima Sinha explains why the country may be on the cusp of a stronger, investment-led growth cycle.
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Arunima Sinha: Welcome to Thoughts on the Market. I'm Arunima Sinha from Morgan Stanley's Global and U.S. Economics teams.
Today, why Canada's economy may be closer to a new growth phase.
It's Monday, October 5th at 10am in New York.
Canada has been in the news recently. There have been lots of headlines related to trade, around population growth, around weak productivity, years of underinvestment. And those are real constraints, and they have weighed on the near-term outlook.
At Morgan Stanley, we are more constructive on the medium-term outlook for Canada. And we recently wrote a report around this along with our strategists titled, “Canada: The Next Acceleration.” And, from our perspective, we think that the near-term uncertainty around trade is actually clouding the opportunity for global investors.
There are three points that we make in the report.
We estimate that the growth model in Canada over the next three to four years can actually pivot from the export-led growth story that we've seen over the past few years into one that emphasizes capital deepening and greater technological diffusion across the economy.
So, it really is about the domestic build-out and the opportunity in shifting away from trade and export-led growth into a more productive economy – that's not just larger over time but can actually grow at a much faster pace as well. And so, by our estimates, we think that potential growth in Canada could feasibly rise from about 1.5 percent to closer to 1.75 percent.
The way that we see it, this really doesn't require things to start from scratch. There are already large capital pipelines that are in place. But one of the things that we do note is that a lot of these pipelines are actually concentrated in a few sectors.
So, about half of these are in utilities and oil and gas, transportation. These sectors together combine about 13 to 14 percent of the gross value add for the economy. But they actually account for more than half of the announced capital pipelines. And so, for the money that's going into the economy – and a lot of this is going into structures – it's not going as much into machinery and equipment.
And so, while the capital build-out is going to support the widening, we also need to think about crowding in private investment into other sectors. And some of these other sectors that we've identified in the note, such as finance, information services, that have historically had much greater gains in productivity – they would need to see bigger capital intentions as well.
The other opportunity that we identify for the Canadian growth model is – although the near-term population growth has been slowing, it doesn't actually change the longer run demographic picture. We looked at what the numbers would be for the working age population growth for Canada, taking 2025 as a starting point. And what we see is that Canadian working age population is going to rise by about 3 percent by 2035, by 5 percent by 2040, and 6 percent by 2045.
Meanwhile, most of the developed economy peers are going to see shrinkage in their working age populations. And so that is really going to give Canada a window into the rest of the 2030s to continue to accelerate its growth model.
From our perspective, the test for the next few years is going to be whether the investment that's being undertaken in a few sectors spreads beyond the big projects. And it really lifts productivity across the economy. Construction, manufacturing, agriculture, and wholesale will be especially important because they are machinery intensive, technology adoption remains low, and recent productivity gaps are large.
If those sectors begin to improve, Canada could enter the 2030s with a much stronger growth engine than it has today. And in our perspective, Canada's potential growth could actually pivot from being about 1.5 percent today to entering the 2030s with close to 2 percent in potential output growth.
Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share our Thoughts on the Market with a friend or colleague today.

Our Global Head of Fixed Income Research Andrew Sheets examines what rising rates could mean for equity valuations, earnings and investor appetite.
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Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.
Today, thinking about equity resilience in the face of rising bond yields.
It's Friday, October 2nd at 2pm in London.
The benchmark U.S. 10-year Treasury yield has risen about 100 basis points this year. Global equities, at the same time, are up about 13 percent. And those two facts sit in an uncomfortable tension.
After all, higher bond yields give investors better return options elsewhere, and they also make future corporate profits worth less today, which in theory should push stock prices lower.
But there's a wrinkle here.
That valuation theory actually has two moving parts. What we're referring to here is what we would call a dividend discount model or a Gordon Growth Model, where the value of a company today is worth the value of its dividends divided by the difference of its required rate of return and its growth rate.
The higher the required rate of return, which interest rates push up, hurts a stock valuation. It increases the denominator. But a higher growth rate, well, that works in the opposite direction. That decreases the denominator. It makes the company worth more.
Hopefully, this is intuitive. if a company has to meet a higher return hurdle, it will be worth less today. If a company's growing faster, all else equal, it's worth more. And that, we think, goes a long way to actually explain what's going on in markets today. Because corporate profits are growing quickly.
Over the last year, profits for the S&P 500 are up about 30 percent, and the earnings growth for the median company, well, that's still up in the mid-teens. Growth in Europe, Asia, and emerging markets have also been historically strong.
Indeed, if you'd told me on January 1st that the S&P 500 would be up about 13 percent, and at the same time, U.S. Treasury yields would be up about 100 basis points, I probably would have told you with reasonable confidence that stocks would look more expensive relative to bonds.
But they don't. The valuation of the equity market, the P/E ratio, has fallen significantly as yields have risen. But because earnings have risen so much more, stocks are still higher. And the so-called equity risk premium, the difference between the earnings yield and the bond yield, it's pretty stable year to date.
Now there's another way that higher yields could hurt the stock market. They could simply cause people to sell their stocks and buy those higher yielding bonds. But so far, we're not seeing evidence of that. The flows that we track continue to show money flowing into both stocks and bonds.
And the two markets are moving in the same direction day to day. They're showing positive correlation, which is not the outcome you'd expect if people were shifting money from one to the other.
There's also an interesting way that companies have a say in this debate. Investors every day look at the market and decide if these yields are high enough that they want to buy them. But companies look at the same yield and say, "Is this low enough that we would want to sell?" And so especially for the companies that are funding the AI build-out – these large technology companies with so much AI spending to do. Many of them, even at these higher yields, are still saying these are attractive levels to issue at. And are more attractive than, say, issuing more stock.
The other factor that's always important to keep in mind whenever we're debating long-term valuation questions between stocks and bonds, or really any asset class, is that valuation is a slow-moving force. It is often not terribly predictive of the next six or even 12 months. Indeed, if we think about the difference between the earnings yield on the equity market, the inverse of the P/E ratio, and what the bond market yields, that difference. Well, that difference only explains about 10 percent of returns between stocks and bonds over the next month.
Now, valuation is more powerful the longer you give it. And so, extend that horizon out over the next three years and that valuation gap between bonds and equities, well, explains about half the three-year outcome.
Markets are not equations that are solved once a quarter. They are ongoing arguments about the future. And when growth is strong, investors are simply more willing to give growth and that future potential the benefit of the doubt.
We think this goes a long way to helping to explain the equity market's resilience despite Treasury yields moving well above five percent. But it's also raising the bar.
Higher yields simply leave less room for earnings disappointment. Those profits need to keep growing quickly.
Thank you, as always, for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.

Betsy Graseck and Michael Cyprys explore how AI could expand advisor capacity and tokenized assets could grow into a $2.3 trillion market by 2030.
Read more insights from Morgan Stanley.

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Betsy Graseck: Welcome to Thoughts on the Market. I'm Betsy Graseck, Morgan Stanley's Global Head of Banks and Diversified Finance Research.
Michael Cyprys: And I'm Mike Cyprys, Head of U.S. Brokers, Asset Managers, and Exchanges Research at Morgan Stanley.
Betsy Graseck: Today, we're looking at the next phase of growth across asset and wealth management – and how tokenization, AI, and changing investor flows could reshape the industry.
It's Thursday, October 1st at 9am in New York City.
Assets under management, or AUM, are near record highs across the globe, with a lot changing beneath the surface. Now, much of the recent AUM growth has come from markets rather than from net new client flows. And meanwhile, fees do remain under pressure.
At the same time, technologies like AI and tokenization are creating new opportunities for both asset and wealth managers. Our base case has tokenized real world assets growing from roughly [$]40 billion today to about [$]2.3 trillion by 2030.
Mike, let's start with tokenization. What are the use cases that matter most near term?
Michael Cyprys: So, as we think about it, there's a number of use cases that we see. The most compelling ones really are around cash treasuries and collateral. Take for example, earning yield. Some tokenized funds allow you to earn interest by the minute or the second that is invested rather than having to remain invested by that 4pm cutoff that is the case today.
Another benefit is allowing collateral to move around a lot more easily, and this can help support a shift toward 24/7 markets. So, if securities can trade 24/7 – or derivatives – you may also need the cash leg of that transaction to keep pace. Right now, there are certain futures contracts that do trade over a weekend, but those positions do need to be pre-funded on Friday.
So that's going to limit perhaps the full uptake for that of 24/7 until you can get the movement of the collateral to keep pace. And that's where tokenization can come in to help solve a real market need.
There's also trapped collateral that's just sitting around the world, where institutions and corporates just keep pockets of liquidity in different places just in case they need it at a moment's notice. There’s a cost to that while it sits idle. But tokenization can allow for just more just-in-time movement of money, say with tokenized deposits, tokenized money funds, or stable coins.
And another use case is around investors outside the U.S. that may not have as easy access to U.S. markets. But tokenization can help lower barriers, reduce frictions, and allow for greater access to U.S. market exposure. Private markets get a lot of attention, but we think that's maybe a little bit further out.
So, to put some numbers around this, today there's around [$]40 billion of tokenized real-world assets. So, think tokenized stocks, bonds, funds. In our base case, we could see that growing to about [$]2.3 trillion by 2030, with a vast majority tied to these collateral mobility and reserve and treasury management use cases.
Betsy Graseck: Pulling up a notch, we are expecting assets under management to reach about [$]247 trillion by 2030. But revenue growth is expected to lag asset growth. Mike, what really separates the firms that can grow above market trends you expect?
Michael Cyprys: Yeah. So, as you said, most of the growth is going to be driven by market beta, right? So, we have expectation for about 9 percent growth annually in assets under management for about $160 trillion globally today to about $250 trillion by 2030. We expect about three-quarters of that growth rate comes from market beta, which leaves you around 2.5 percent for organic asset growth.
So, growing just AUM with the market is not going to really be enough to differentiate. And so, as we think about, you know, how one can differentiate? First, I think it comes down to where one is positioned across the industry. We do see flows concentrating in passive solutions and selected private markets, and the economics can be pretty different there as well.
Another way to differentiate is through distribution. Wealth, retirement, model portfolios, customized solutions, all of those channels are becoming much more important. And so, you want to be closer to where that asset allocation decision is actually getting made.
And another point of differentiation is around operating leverage, and that's where AI comes in, which I'm sure is a topic we're going to get to in a little bit. That we think can help allow money managers to expand research coverage, can allow salespeople to cover more clients, allow for adding more products and customization without adding necessarily a lot more people and cost at the same rate.
So, look, bottom line, I'd say, we think above market growth from having the right products, the right distribution, getting them in front of the right clients, and the technology to scale that just a lot more efficiently.
Betsy Graseck: And how important is that AI tool going to be, in your opinion, for separating yourself from the pack? And is it more top-line generative or cost efficiency generative?
Michael Cyprys: I think it's critical. It's both. I think it changes the competitive game because a lot of the economics are very different across the businesses, right? Take passive and index investing, for example, that continues to take share.
It's a low-fee business, so there scale really matters. In solutions and private markets, the revenue opportunity is better, but you need more capabilities and distribution reach. And in private markets, origination is also key, as well as distribution, right?
You can have private credit or an infrastructure product out there in the marketplace. But if you can't get it into a wealth or retirement or insurance channels, then you're leaving a lot of growth on the table.
And then with traditional active, performance still matters, but the wrapper is key. Distribution matters more so than ever, and active ETFs are a great example of that.
Betsy Graseck: And one question on AI is: How far along do you think it is in your coverage embedded already in the workflow and the processes across your group, your asset managers?
Michael Cyprys: So, we're pretty early days here. A lot of firms, already have AI tools today: RFP tools, sales tools, tools within the operational and distribution side.
But saving someone, you know, 10 minutes on a task doesn't necessarily show up in the P&L, right? You need to start removing entire steps from workflows. And then using that time savings to cover more clients, to launch more products, do more research, and ultimately slow the pace of hiring.
And that's where we think the industry needs to move towards, away from these, sort of, point solutions into an enterprise workflow. And that is tools that connect across the entire organization, underpinned by the same data and the same controls. And our work suggests that this could be pretty meaningful over time, perhaps up to as much as 15 points worth of operating margin improvement – for the leaders over time. But we don't assume that all falls to the bottom line.
We expect it to – you know, a lot of that's going to get reinvested, and a portion probably also gets competed away. And when we look at our forecasts for the money managers we cover, I'd say we have modest improvement in operating margins over the next couple of years.
And, to your point, on cost versus revenue, we may actually see it on the revenue side first, as it can help allow for more client touches, broader coverage, and faster product development.
Betsy Graseck: Okay. So, or as you mentioned, early days.
How do you see AI and tokenization impacting either the leverage opportunities, the operating leverage opportunities, or the revenue growth opportunities? Let's start with AI.
Michael Cyprys: We think that the potential here is to really improve the capacity to serve clients. As you think about today, the time that advisors spend actually not talking to clients, right? When you think about time that they're spending on meeting prep or research, notes, follow-ups, onboarding.
And that's a lot of administrative work that is wrapped up, in terms of the advisor’s relationship there. And our work suggests that call it about half of that advisor time could be freed up.
Then advisor capacity could increase upwards of 30 to 40 percent on our numbers, and that can also increase the quality and the experience that the clients receive.
We also see a broader opportunity beyond just the advisor. As you look across the advisor team and the organization, we see an overall cost to serve to come down quite materially.
And I know this is a question you didn't ask it, but that's out there. We don't see AI replacing financial advisors, particularly at the higher end, just given the importance of that trusted relationship. And if anything, the value of that advisor probably goes up, particularly just given there's so much change happening around the world every which way you look. And then you overlay that with the aging demographic trends.
We actually think there could be a bull market for advice as we look ahead. And AI could be that tool to enable the industry to execute on that market opportunity set and also help expand the TAM in terms of the ability of the industry to capture that opportunity set and bring advice to more people than was ever possible before.
Betsy Graseck: And this would be incremental to your growth outlook that you indicated earlier of 7 percent?
Michael Cyprys: This could be incremental…
Betsy Graseck: Okay!
Michael Cyprys: ... to that opportunity potentially over time.
Betsy Graseck: Anything on tokenization that is an opportunity for wealth managers?
Michael Cyprys: Oh, absolutely. And I think that we're really, really early days; just scratching the surface on this in tokenization and wealth.
You know, I think one way to frame tokenization and wealth is it could just make the client balance sheet that much more productive.
And this creates some risk as we talk about in the report for the traditional wealth model with respect to sweep cash and the monetization of that, right? If clients hold less idle cash, that could put some pressure on deposit and sweep economics. But that could also be offset by new lending opportunities at the same time.
So, wealth firms need to be able to support tokenized assets and lending capabilities without losing that client relationship to someone else's platform. And that's why longer term, the wallet or the client interface becomes pretty important – because that's where the investments, cash borrowing, payments, all of that comes together.
Betsy Graseck: And all of this happening right ahead of Nasdaq and NYSE's December 6th, a big event.
Michael Cyprys: That's right. U.S. equity markets are going 23/5 on December 6th.
Betsy Graseck: Meaning that the only hours they will be closed every day are between...
Michael Cyprys: 8 and 9pm.
Betsy Graseck: And that's on a pathway to 24/7 ultimately, you believe?
Michael Cyprys: That's our expectation, as you have other disruptors around the world that are looking to provide retail with access to 24/7 markets.
Betsy Graseck: Exciting times, Mike. As you indicated in the beginning, we have 79 percent growth with AI and tokenization potentially amping that up ahead of a pathway to a 24/7 market.
Michael Cyprys: Indeed.
Betsy Graseck: Thank you so much for joining us here on Thoughts on the Market, Mike.
Michael Cyprys: It's been great speaking with you, Betsy.
Betsy Graseck: And thank you for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen, and share the podcast with a friend or colleague today.

As investors look toward the U.S. midterm elections, the biggest question is what could change. Our Head of U.S. Public Policy Research Ariana Salvatore outlines the signals worth watching.
Read more insights from Morgan Stanley.

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Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of U.S. Public Policy Research at Morgan Stanley.
Today, I'll be talking about the upcoming 2026 midterm elections.
It's Wednesday, September 30th, at 10am in New York.
As the elections inch closer, investors are increasingly asking about potential ramifications. We just put out a deep dive covering our expectations, and we arrive at four key takeaways.
The first, midterms are unlikely to change the core executive-led policy agenda. As we've been noting for some time, a lot of the policy uncertainty that markets have dealt with since the beginning of 2025 has actually come from the executive branch rather than Congress.
Tariffs, trade policy, deregulation, immigration, and export controls are all variables that are going to remain within the White House's authority. So even if control of Congress changes, we don't think investors should assume that those parts of the policy agenda simply go away. Where Congress actually matters more is on fiscal policy. But even there, the range of outcomes is relatively narrow.
The main differences revolve around the timing of scheduled SNAP and Medicaid cuts, defense spending, and how future government funding and debt limit negotiations evolve.
So, that's our first takeaway. Midterms can change the mechanics of governing, but probably not the broader direction of the executive agenda. That means policy uncertainty, at least across those vectors I mentioned, is likely to stay high.
Takeaway number two, we'd be careful about treating the midterms as a direct signal for the 2028 presidential election. Historically, what we see is the issues that dominate a midterm don't necessarily translate to the next presidential race.
Looking at the six midterm-to-presidential cycles since 1994, the top-ranked issue changed in five of them. And the issue that ultimately proved decisive in the presidential election was actually already visible at the midterm in only two of the six cases. What elections can tell us, however, is where some of the policy fault lines are beginning to form.
We're watching four debates in particular in that context: the fiscal and Social Security debate, individual tax landscape, restrictions on data center development, and healthcare. In our view, across those variables, the useful signal isn't simply which party wins more seats. It's which versions of these policies are beginning to gain traction with voters and within the parties themselves.
That actually brings us to takeaway number three. AI is one area where the midterms could matter, but mainly through data center policy rather than broad AI regulation.
We think it's important to separate those two issues. So first, on data centers, we do see midterms as a catalyst. And that's because many of the most important policy levers sit at the state and local level: permitting, siting, grid interconnection, large load electricity rates, and tax incentives. So that means that the governorships, utility commissions, and state legislatures can actually have a much more immediate effect on the pace and the location of the build-out than Congress itself.
In that vein, our base case remains a conditional build-out, meaning the expected level of AI CapEx can continue. But likely it's going to increasingly concentrate in locations where developers can address concerns around things like electricity costs, infrastructure, water, and community impacts.
Broader AI safety regulation is different. Here, we think government configuration actually matters less, and that's because we see comprehensive federal legislation as pretty unlikely in the near term, absent a high salience event or incident. So congressional control is not necessarily the key driver.
And finally, takeaway number four: for markets, we see more micro implications than macro ones. For equities, the composition and cohesion of the congressional majority can matter for individual sectors. Congress that's able to negotiate changes to scheduled SNAP or Medicaid cuts, for example, could have implications for consumer and healthcare companies.
AI related sectors could also respond to changes in expectations and sentiment pertaining to data center restrictions. For rates, the key question is whether the election produces fiscal outcomes that materially change expected deficits.
United Republican control would be the only outcome preserving reconciliation as a potential vehicle. Divided government, conversely, would narrow the scope for new legislation and put more emphasis on funding and debt limit negotiations. And for the dollar, our strategists see the transmission mechanism running primarily through U.S. yields and the growth outlook rather than the election itself.
So, bottom line, we don't think the 2026 midterms are likely to produce a wholesale change in the policy or macro backdrop. But there will be important lessons to pick up along the way.
Thanks for listening. If you enjoy the show, please leave us a review wherever you listen. And share Thoughts on the Market with a friend or colleague today.