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Japanese and South Korean defence stocks have surged to record highs on expectations that European countries will purchase more military equipment from Asia after Donald Trump threatened to withdraw the US’s security umbrella.
Shares in Hanwha Aerospace, South Korea’s leading artillery company, are up 131 per cent this year, while Mitsubishi Heavy Industries, Japan’s largest defence contractor, has gained 28 per cent.
The stocks rose 6.8 per cent and 12.2 per cent, respectively, on Monday after German lawmakers agreed to increase infrastructure and defence spending last week.
“Sentiment is very strong around defence” after the agreement in Germany, said Wendy Pan, an analyst at Macquarie in Tokyo. German lawmakers will vote on the €500bn programme on Tuesday.
Monday’s rally added to a record run for east Asian defence stocks, with Hanwha Aerospace and MHI skyrocketing more than five times in value since the end of 2022 as the war in Ukraine spurred global rearmament.
Shares of South Korean tank producer Hyundai Rotem are up 115.3 per cent this year as the company expects to win supply contracts from Poland and Romania in the coming weeks. Fighter jet manufacturer Korea Aerospace Industries has risen 72.3 per cent so far in 2025.
Dongho Jeong, an analyst at Mirae Asset Securities, said South Korean companies could win up to Won154tn ($106bn) of orders, representing a quarter of non-US western countries’ spending on weapons.
Europe has struggled to expand production after Russia’s full-scale invasion of Ukraine, said Eon Hwang, a vice-president at Nomura covering industrials. Trump has added to the pressure by calling on Nato countries to raise defence spending to 5 per cent of GDP and threatening to leave allies undefended if they did not comply.
While the continent reduced defence manufacturing after the Soviet Union’s collapse, South Korea maintained production capabilities to counter the threat of North Korea, making weapons at scale and low cost. The country has become a top-10 defence exporter since the war in Ukraine began.
“The economies of scale are completely different,” said Hwang of the military supply chains in South Korea compared with Europe.
Japan’s defence companies make up less than 1 per cent of global arms exports and lack commercial experience after the nation’s postwar pacifist constitution left them outside military procurement processes for decades.
But they are expected to benefit from increased demand for defence hardware from other nations after Japan overturned a long-standing ban on arms exports in 2014 and further loosened rules at the end of 2023.
Japan’s IHI, which makes rockets and jet engines, is up 22.3 per cent for the year, while Kawasaki Heavy Industries has risen 32.6 per cent and artillery maker Japan Steel Works has gained 7.5 per cent.
“The potential German budget increase in defence is large,” said Macquarie’s Pan. “I don’t think Germany’s current defence industry has enough capacity to support this development without expanding its production capacity or relying on collaboration with other countries such as Japan.”
Japan’s MHI is already involved in Europe’s next-generation fighter jet programme, working alongside the UK’s BAE Systems and Italy’s Leonardo.
It is also competing for a contract to build frigates for the Australian navy, while South Korea’s Hanwha on Tuesday disclosed it had acquired a substantial stake in Australian shipbuilder Austal.
Asian defence groups are becoming increasingly vocal about the export opportunities. In a briefing last week, Mitsubishi Electric lifted defence order expectations for 2025 to ¥600bn ($4bn) from ¥500bn and flagged radar systems as a key opportunity.
Japan “is a rare case of having a developed arms manufacturing base without exporting anything”, said Edward Bourlet, an analyst at CLSA.
The country has committed to raising defence spending to 2 per cent of GDP by 2027, and the government in 2023 increased the maximum profit margin for defence contractors to 15 per cent from 8 per cent.
Tokyo has come under further pressure to lift defence outlays after Trump questioned the fairness of Japan’s mutual security pact with the US.
European defence shares have also soared in recent weeks amid pledges of increased spending on the continent. Shares in Rheinmetall, Germany’s largest defence company, are up 122.6 per cent this year while BAE shares have risen 42.5 per cent.
