Nikkei Falls 2.7% as AI Spending and Oil Revive Inflation Fears

The broader TOPIX declined 1.05% to 4,011.31. Its smaller fall reflected continued resilience in railways, pharmaceuticals and other domestically oriented shares, while the price-weighted Nikkei was dragged lower by steep losses in semiconductor, AI infrastructure and technology investment names.

Despite the sharp daily decline, the Nikkei finished the week about 0.7% higher after recovering part of the previous week’s 6.4% slide. The index remained nearly 8% lower for July and well below its June record, showing that Tokyo has not yet restored confidence after entering correction territory earlier this month.

Nikkei CNBC’s market framing centered on Tokyo’s increasing sensitivity to global AI positioning. Japanese technology shares have been moving closely with the U.S. Philadelphia Semiconductor Index and South Korea’s Kospi as overseas investors treat Tokyo, Seoul and U.S. semiconductor shares as part of the same broad AI, memory-chip and data-center trade.

That relationship weighed heavily after Alphabet shares fell sharply in the United States despite strong operating results. Investors focused instead on the company’s rising AI infrastructure budget and the possibility that heavy capital spending could weaken free cash flow before producing an adequate return.

The market reaction reinforced a growing distinction between companies that supply AI infrastructure and the technology groups paying for it. Chipmakers, equipment producers and component suppliers can benefit immediately from data-center construction, while cloud and internet companies face increasing scrutiny over whether their spending will produce sustainable profit growth.

Advantest fell 6.02%, Tokyo Electron dropped 4.99% and SoftBank Group lost 7.06%, making the three stocks major contributors to the Nikkei’s decline. Kioxia Holdings fell 9.49%, resuming its extreme volatility after a sequence of double-digit gains and losses over the previous week.

SoftBank Group’s decline had an outsized effect on the Nikkei because of its large index weighting. The company has become a major proxy for global AI investment sentiment through its technology holdings and exposure to large-scale artificial intelligence infrastructure plans.

Advantest and Tokyo Electron were sold as investors reduced exposure to chip-testing and semiconductor manufacturing equipment. Both companies are expected to benefit from long-term AI demand, but their share prices remain highly sensitive to overseas technology valuations and changes in capital-spending guidance.

Kioxia’s decline again highlighted the risks surrounding heavily traded memory shares. The company remains one of Tokyo’s clearest measures of confidence in AI servers and advanced memory demand, but large speculative and margin-financed positions have amplified its price movements.

The technology selloff contrasted with gains in domestic-demand shares. East Japan Railway and West Japan Railway rose nearly 2%, while Central Japan Railway gained 1.62%. Otsuka Holdings was the strongest Nikkei performer, rising about 2.2%.

The railway gains suggested that some investors were rotating toward businesses supported by domestic travel, tourism and relatively stable demand. Defensive pharmaceutical shares also attracted buying as investors reduced exposure to the more volatile AI trade.

Across the Tokyo Stock Exchange’s Prime Market, about 56% of stocks declined, 40% rose and 3% were unchanged. The figures showed that the selloff was broad but less severe outside the Nikkei’s large technology components.

The yen remained near its weakest level in about four decades as rising U.S. yields and concern over global inflation supported the dollar. The currency’s weakness kept Japanese authorities under pressure to prevent further depreciation, especially as oil prices increased.

The weak yen is increasingly being treated as a risk rather than simply an advantage for exporters. Currency depreciation raises the yen value of overseas earnings, but it also increases the cost of crude oil, liquefied natural gas, food, chemicals and industrial materials.

Japan’s benchmark 10-year government bond yield rose to around 2.8%, reflecting pressure from higher global yields and concern that expensive energy and a weak currency could push Japanese inflation higher later in the year.

The yield remained below the 30-year high of 2.90% reached on July 9, but bond investors continued to watch the 3% level as a possible test of confidence in Japan’s fiscal position. Higher yields increase government financing costs and could complicate Prime Minister Sanae Takaichi’s plans for large-scale strategic investment.

The Bank of Japan faces an increasingly difficult policy decision ahead of its July 30-31 meeting. Officials must balance inflation pressure from oil and the yen against signs that underlying consumer inflation remains below the bank’s target.

Government data released on July 24 showed that core consumer prices, excluding fresh food, rose 1.6% in June from a year earlier, accelerating from 1.4% in May but remaining below the BOJ’s 2% target for a fifth consecutive month.

An index excluding fresh food and energy slowed to 1.7% from 1.8%, while service inflation eased to 1.2%. Food inflation moderated as rice prices declined, suggesting that domestic price pressure was not yet accelerating broadly.

The relatively subdued consumer figures contrast with a sharp increase in costs further up the supply chain. Wholesale inflation rose 7.1%, its fastest pace in more than three years, reflecting the weak yen, higher commodity prices and geopolitical disruption.

That gap suggests companies may still be absorbing part of the increase in their costs. Further price rises could emerge later in the year if businesses pass more of those expenses on to consumers.

Reuters reported that the BOJ is likely to retain a warning that inflation could exceed its forecasts but does not currently see a major increase in risks compared with three months ago. Officials are expected to keep the policy rate at 1% next week while assessing whether higher oil and import costs spread more broadly through the economy.

Some policymakers favor faster tightening because the yen remains weak and producer prices are rising sharply. Market economists generally expect another increase to 1.25% between October and December if companies continue passing costs on to households.

For households, the inflation mix remains difficult. The current increase is being driven heavily by imported energy and other supply-side costs rather than strong consumer demand, meaning higher prices could weaken real purchasing power rather than signal a healthy expansion in spending.

TV Tokyo’s broader business coverage has continued to focus on this divide between nominal wage growth and household purchasing power. Companies continue raising pay in response to labor shortages, but families face renewed pressure from fuel, electricity, food, transportation and manufactured goods.

Energy prices became the most important global risk on July 24. Brent crude moved above $100 a barrel as renewed tensions in the Middle East kept attention on the Strait of Hormuz and other key shipping routes.

The risk of disruption is especially serious for Japan because the country imports most of its energy. Oil above $100 would raise costs for airlines, shipping companies, logistics operators, utilities, chemical producers and manufacturers. The effect is magnified by the weak yen because international energy contracts are generally settled in dollars.

The government’s annual economic white paper added to the policy debate, warning that inflationary pressure is mounting and that companies are passing on higher costs more quickly than during the energy shock that followed Russia’s invasion of Ukraine. The report said corporate and household inflation expectations are accelerating, supporting the BOJ’s view that price increases are becoming embedded in the economy.

At the same time, the white paper pointed to resilience in corporate investment, with business investment plans exceeding historical averages for a second straight year. That supports the government’s argument that Japan can shift toward a more investment-led growth model, but the Middle East conflict and higher energy prices remain a major risk to the output gap and household demand.

Japan also announced a preliminary finding that hot-dip galvanized steel sheets and coils imported from South Korea and China were being sold at unfairly low prices, harming domestic producers. The investigation began after a petition from companies including Nippon Steel and Kobe Steel and has been extended until December 12, 2026.

The case reflects pressure on Japan’s basic-materials industries from weak domestic demand and cheaper imports. Possible anti-dumping duties could support domestic steel pricing but may also raise costs for manufacturers that rely on coated steel products.

The global backdrop remained unfavorable for risk assets. Asian technology shares weakened as investors reassessed AI valuations, rising capital-spending requirements and the effect of higher oil prices on global inflation.

Fresh U.S. tariffs also added to inflation and trade concerns. Washington’s new duties on goods from dozens of countries increased uncertainty over supply chains and reinforced expectations that central banks may need to keep interest rates higher for longer.

U.S. Treasury yields rose sharply, supporting the dollar and widening pressure on currencies such as the yen. Higher American yields also make it more difficult for Japanese authorities to stabilize the currency without either intervention or a clearer shift in BOJ policy expectations.

What to watch next: whether the Nikkei can hold above 64,000 after another steep AI-led decline, whether Kioxia, Advantest, Tokyo Electron and SoftBank Group attract bargain buying, and whether railway and other domestic-demand shares continue to outperform.

Investors will also monitor whether Brent crude remains above $100, whether the yen weakens further toward intervention-sensitive levels and whether the 10-year JGB yield moves back toward 2.9% or 3%.

The BOJ’s July 30-31 meeting will be the central domestic event. Markets will focus on the bank’s inflation forecasts, its assessment of the oil shock and yen weakness, and whether Governor Kazuo Ueda provides clearer guidance on a possible rate increase later in 2026.

Major U.S. earnings from Microsoft, Meta, Amazon and Apple will also be critical. Continued AI spending could support Japanese chip suppliers, but further evidence of weaker cash flow or uncertain returns could deepen the global technology correction.

Source: CNBC

Disclaimer : This story is auto aggregated by a computer programme and has not been created or edited by DOWNTHENEWS. Publisher: newsonjapan.com