Japan's Nikkei 225 index tumbled 2.8% on Friday, reversing the previous session's gains, as a global sell-off in technology shares overshadowed the Bank of Japan's (BOJ) decision to keep interest rates unchanged. The decline was led by chip-related stocks, with Advantest falling 9.1%, Tokyo Electron losing 5.6%, and SoftBank Group dropping 6.7%. Ibiden plunged 15.2%, while Lasertec declined 13.8%.
The BOJ held its benchmark rate at 1.25% in an eight-to-one vote, as widely expected. However, the central bank acknowledged that underlying inflation had reached roughly 2%, signaling that further rate hikes could be on the horizon. Board member Hajime Takata dissented, advocating for an immediate increase to 1.5%.
The selling pressure began before the BOJ's announcement, triggered by losses on Wall Street. The Nasdaq Composite fell 1.4% on Thursday, and Alphabet plunged 12.6% as investors scrutinized the costs of its AI expansion. Weak reactions to Intel and Amazon's earnings added to concerns about the massive capital expenditures required for data centers and computing equipment.
Japanese suppliers are heavily exposed to this spending cycle. The broader Topix index fell a milder 1.3%, indicating that the sell-off was concentrated in technology heavyweights rather than spread across the market.
Investors are not necessarily worried about a drop in demand for advanced chips, but rather that customers pouring money into AI infrastructure may struggle to generate sufficient returns, potentially limiting future orders for Japanese equipment makers.
The BOJ's rate pause offered little relief. The bank's statement noted that inflation pressures could justify further tightening, leaving Japanese equities facing two risks simultaneously: a potential slowdown in AI spending and faster domestic rate increases.
Market pricing before the decision suggested an 80% probability of a December rate hike. ANZ economists forecast a 25 basis point increase in December and another in March. However, these are predictions, not commitments, and will depend on Governor Kazuo Ueda's comments, incoming inflation data, and corporate earnings.
The next round of Japanese corporate results will be crucial. Strong order books at chip equipment manufacturers could counter fears of a spending slowdown, while cautious guidance would give investors another reason to reassess valuations. Lower energy costs and steadier US technology shares could help Japanese equities recover, but another bout of disappointing AI earnings combined with faster domestic tightening would make a rebound harder.
This article is for informational purposes only and does not constitute financial advice.
