With positive GDP growth and increasing revenues, Japan equities are becoming a preferred market globally. ----- Transcript -----Chetan Ahya: Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanley's Chief Asia Economist. Daniel Blake: And I'm Daniel Blake, Asia and Emerging Markets Equity Strategist. Chetan Ahya:  Over the last two days in this special three part series on Japan, we discussed a constructive outlook for Japan's economy and the various structural reforms it's undergoing. Today in this final episode focused on Japan, we'll talk about the key investment implications of these macro trends. It's Friday, July 21st at 9 a.m. in Hong Kong and Singapore. Chetan Ahya: Dan, you've been highlighting Japanese equities as our most preferred asset within the region and globally. Your bullish view is based on three powerful drivers of outperformance coming together, namely macro, micro and multipolar world. Starting with the macro, our economists expect an uplift in nominal GDP growth trend, how does this benefit Japanese equities? Daniel Blake: So we see this being another era for the Japanese market, having first exited deflation in 2013 with the initial Abenomics program, but now moving into positive nominal GDP growth from 2023 onwards. It's hugely important for companies who have been hemmed in with an inability to lift prices and hence they have been unable or unwilling to lift base wages or dividend levels. So this new pricing flexibility in top line growth supports the equity market in five key ways. First, we're going to see faster revenue growth. Second, we think this will mean wider operating profit margins given fixed cost leverage will now be working in favor of the bottom line. Third, financial sector earnings have been repressed by ongoing Bank of Japan policy, but a gradual process of normalization should help release the earnings power of Japanese financials. Fourth, domestic portfolios are highly risk averse and focused on cash and deposits. We think there will be some ongoing shift towards higher return assets, including equities. And finally, we think valuations for the equity market can continue to trend higher on convergence with global norms. Chetan Ahya: And on micro front, we've been discussing about the improvement in corporate governance for almost a decade now. What's changed this year? Daniel Blake: Yes, the environment has been changing for the better part of a decade, really since the introduction of the corporate governance and stewardship codes back in 2015 and 16. We are seeing progressive improvement with record levels of investor activism and engagement, and we're seeing signs that management teams are taking up the challenge of improving profitability with record buybacks and record levels of dividend payout ratios. That said, the progress has been patchy at times and coming into this year, 50% of equity market constituents were still trading below book value. So what's changed this year is in this backdrop of improving corporate governance we've had new calls from the Tokyo Stock Exchange for companies trading below book value to explore ways to meet their cost of capital and lift valuations. We think that additional support that will come through as companies look to engage with investors and unlock value will help to boost Japan's sustainable return on equity to 11 to 12%, that compares with Japan's 15 year average of just 4% before the Abenomics program took hold. And it would bring it up more consistent with global averages. Chetan Ahya: Dan, one of the big themes Morgan Stanley research is exploring deeply this year is the transition from a globalized or multipolar world. How does this emergence of multipolar world impact Japan and its equity markets in particular? Daniel Blake: Thanks, Chetan. And as we're thinking about a multipolar world transition, we think there are two scenarios for global supply chains and interdependencies. One is a de-risking process, which is our