Morgan Stanley researchers, headed by Ukyo Haraguchi, say recent volatility in Japanese equities is increasingly linked to developments in the global oil market as geopolitical risks have intensified. In a client note the team wrote that "with oil prices elevated amid geopolitical risk, Japanese equities hinge on oil moves," and added that "a defensive stance looks appropriate for now."
The analysts trace sharp swings earlier in March to an outbreak of conflict involving the United States, Israel and Iran on Feb. 28. They reported that equities "tumbled in the week following the outbreak of the conflict," and that crude oil spiked as vessels were blocked from the Strait of Hormuz.
Morgan Stanley noted a temporary fall in oil after President Trump said the conflict was "very close to finishing," but the bank emphasized that as of March 17 the strait "remains effectively closed." On that basis the analysts said it is now "hard not to conclude that Japanese equities are largely driven by developments in the oil market."
The note references five-minute interval data for Nikkei 225 futures and crude futures, stating these series show "particularly strong" co-movement since March 9, the point at which oil began surging.
Looking at factor implications, Morgan Stanley said that if high oil prices persist, "value should outperform." The bank also suggested that low-volatility factors can provide help but require tactical positioning rather than a permanent tilt.
Separately, the firm highlighted its Earnings Window Momentum strategy, arguing that earnings windows "capture a disproportionate share of stock-specific information" and can deliver "durable cumulative and risk-adjusted outperformance," with particular relevance in Japan.
Within the bank's internal 17-factor ranking, Deep Value has risen to the top, while momentum indicators have "broadly deteriorated," a dynamic the analysts interpret as an investor shift toward defensive and smaller-cap exposures.
Analysis context
The Morgan Stanley note connects geopolitical developments and oil-market behavior directly to recent moves in Japanese equity markets, highlights short-interval co-movement between equity and crude futures, and sets out factor-level implications for investors considering defensive, value and low-volatility exposures.