Nikkei Rebounds as Middle East Tensions Ease

The broader TOPIX rose 54.76 points, or 1.37%, to 4,066.07, outperforming the Nikkei as buying spread across banks, consumer shares, services, rubber products, airlines, steel and other sectors that had lagged during the recent technology-led correction.

The Nikkei opened sharply higher at 65,164.98, briefly climbed to 65,220.69, then fell as low as 64,123.40 before recovering into the close. Prime Market trading volume totaled about 2.26988 billion shares, with trading value of roughly 9.3556 trillion yen.

Market breadth was unusually strong. About 90% of Prime Market stocks advanced, showing that investors were not simply returning to the artificial intelligence trade but were also buying a wider range of shares that had been left behind during the recent rotation.

Nikkei CNBC’s market framing centered on a return-reversal trade after the sharp swings of the previous two weeks. Investors bought back domestic-demand, entertainment, consumer and value shares as Middle East risk appeared to recede, while semiconductor-related names remained under pressure after weakness in U.S. chip shares.

The July 27 session therefore marked a different kind of rebound from the post-holiday rally on July 21. Earlier buying had focused heavily on semiconductor and AI-related shares. This time, the stronger tone came from the broader market, while some of the largest AI names continued to weigh on the Nikkei.

The improvement in sentiment followed U.S. President Donald Trump’s indication that major military action against Iran would be postponed for the time being, raising hopes that negotiations toward ending the fighting could resume. That reduced immediate concern about an energy shock and supported buying in sectors that would benefit from lower oil prices and more stable global risk appetite.

Airlines were among the strongest sectors as crude prices fell. Lower fuel costs are particularly important for aviation because jet fuel is one of the industry’s largest expenses. The decline in oil also helped ease concern over inflation pressure on transport companies, logistics operators, retailers and households.

The TOPIX’s outperformance showed that investors were willing to buy the wider Japanese market even though confidence in the AI trade remained fragile. Banks, services, steel, rubber products and consumer-related shares helped lift the broader index, while mining, petroleum, coal products, chemicals and nonferrous metals were among the few sectors to decline.

Fast Retailing, Recruit Holdings, Konami Group, Bandai Namco Holdings and Kyocera were the biggest positive contributors to the Nikkei. Their gains pushed the index higher even as several semiconductor-related heavyweights fell.

Fast Retailing rose as investors bought back major domestic-consumption and global retail names after the previous week’s risk-off trading. Recruit gained as the market returned to service and internet-related shares, while Konami and Bandai Namco advanced as entertainment stocks attracted renewed interest.

Nintendo, Toyota Motor, Sony Group, Hitachi and Keyence also drew buying. The strength in entertainment, autos, electronics and factory-automation names suggested that investors were looking for large, liquid companies outside the most crowded semiconductor positions.

Sanrio and Shiseido rose sharply, reflecting a return of interest in consumer brands and inbound-tourism-related shares. The gains also showed that investors were seeking companies with pricing power and brand strength at a time when household costs remain under pressure.

Toyo Engineering jumped, while software and service names including Raks, Appier Group, Simplex Holdings, SHIFT, BayCurrent and Visional also rose. The move suggested that money was rotating into growth shares less directly tied to the AI hardware cycle.

Macnica Holdings gained after reporting that recurring profit for the April-June quarter rose 3.2-fold, supported by strength in semiconductors. The result helped show that parts of the chip supply chain remain fundamentally strong despite the recent market correction.

Semiconductor shares, however, were mixed to weak. Tokyo Electron, Taiyo Yuden, Sumco, Lasertec and Disco were firm, but Kioxia Holdings, Advantest, Fujikura, Ibiden and SoftBank Group fell. The divide showed that investors remain selective after the rapid unwind in AI-related positions.

Kioxia continued to dominate trading value and remained one of the market’s most closely watched stocks. It fell again, although it pared losses toward the close. The memory-chip maker has become a barometer of confidence in AI servers, data centers and high-bandwidth memory, but heavy speculative trading and margin-financed positions have made its share price especially volatile.

Advantest was the largest negative contributor to the Nikkei, followed by SoftBank Group, Shin-Etsu Chemical, Chugai Pharmaceutical and Fujikura. Together, those five stocks subtracted heavily from the index and prevented the Nikkei from matching the strength seen in the broader TOPIX.

SoftBank Group remained under pressure because of its sensitivity to global AI investment sentiment. The stock’s large index weighting means even moderate selling has an outsized effect on the Nikkei.

Shin-Etsu Chemical fell sharply after its operating-profit guidance for the year ending March 2027, though calling for a 10% increase, was judged insufficient by investors. The reaction showed that earnings expectations remain demanding for companies linked to semiconductors, chemicals and high-end materials.

Chugai Pharmaceutical also declined, while Fujikura, Ibiden, KOA, Sumitomo Electric and Resonac Holdings were weak. The fall in wire, component and materials names reflected caution toward parts of the AI and electrification supply chains that had rallied strongly earlier in the year.

The yen remained near historically weak levels, even as the dollar softened slightly after the easing of Middle East tensions. The Bank of Japan’s 5 p.m. foreign-exchange data showed the dollar at 163.52-163.53 yen, 24 sen lower than the previous business day.

The currency remains close to its weakest level in about four decades. That keeps traders alert for further warnings from Japanese authorities, especially if the yen weakens toward 164 or 165 to the dollar.

The weak yen remains a double-edged factor for Japanese equities. It supports exporters by raising the yen value of overseas earnings, but it also increases import costs for fuel, food, raw materials and industrial inputs.

With households already sensitive to higher prices, the yen’s weakness has become a central political and economic issue. It raises the cost of gasoline, electricity, imported food and manufactured goods, placing pressure on consumers even as wage growth improves.

Japanese government bond yields also remained central to the market narrative. The benchmark 10-year yield eased from recent highs, with market data placing it around 2.77%, below the 30-year high near 2.90% reached earlier in July.

The pause in the yield rise helped improve equity sentiment. Bond-market pressure had become a major constraint on Tokyo shares because investors were worried that higher borrowing costs could challenge Japan’s fiscal position and complicate the government’s investment agenda.

The Bank of Japan is expected to keep its policy rate at 1% at its July 30-31 meeting, but Reuters reported that the central bank is likely to maintain a hawkish tone and leave room for further rate increases as price pressures build.

The BOJ is facing pressure from several directions. The yen remains weak, producer prices have been lifted by energy and import costs, and companies are announcing further price increases for food and daily necessities.

At the same time, oil’s retreat from recent highs reduces the immediate risk of a fresh energy shock. Reuters reported that the BOJ is likely to upgrade its fiscal 2026 growth forecast while cutting its inflation estimate slightly because of subsidies and lower oil prices compared with earlier assumptions.

Governor Kazuo Ueda’s news conference will therefore be closely watched. Investors want to know whether the BOJ sees the yen and import prices as strong enough reasons to move toward another rate increase, or whether it will wait for clearer evidence that companies are passing higher costs on to consumers.

Reuters reported that analysts polled by the news agency expect the BOJ to raise rates to 1.25% by the end of December, with October or December seen as the most likely timing. Some analysts believe a move could come earlier if the yen continues to fall or if inflation overshoot risks increase.

Policy attention also remains on Prime Minister Sanae Takaichi’s economic strategy. The government has called for more than 370 trillion yen in combined public and private investment through fiscal 2040, targeting semiconductors, artificial intelligence, energy security, shipbuilding, defense, space, robotics and other strategic industries.

The plan is designed to strengthen Japan’s growth potential and supply-chain resilience, but investors continue to watch how it will be funded. Fiscal concerns have already contributed to volatility in the JGB market, especially when draft policy wording appeared to call for closer coordination between the government and the BOJ.

The final version of the blueprint included language intended to reassure markets that specific monetary policy tools remain under the BOJ’s authority. Even so, investors remain sensitive to any sign that fiscal expansion could make it harder for the central bank to raise rates.

TV Tokyo’s broader business coverage has continued to focus on inflation, wages, energy costs and household finances. Those issues remained central on July 27, even as lower oil prices gave markets some relief.

For consumers, any sustained decline in crude oil would ease pressure on gasoline, electricity, transport and food distribution costs. However, the yen’s weakness limits the benefit because energy and commodity imports are priced largely in dollars.

For companies, the same divide remains important. Businesses with pricing power can pass higher costs on to customers, while smaller firms and cost-sensitive retailers face pressure on margins. The market’s renewed interest in branded consumer names, entertainment shares and domestic-demand stocks suggests investors are favoring companies able to defend profitability despite inflation.

The global backdrop improved after oil prices dropped on signs of a pause in U.S.-Iran military action. Reuters reported that U.S. crude fell more than 6% to $83.66 a barrel, while Brent dropped nearly 7% to $90.18.

The decline in oil helped ease fear that Japan would face another immediate wave of imported inflation. It also supported airlines and other fuel-sensitive shares while weighing on energy-related sectors.

U.S. markets were mixed, with the Dow Jones Industrial Average rising while the Nasdaq slipped. Investors remained cautious ahead of a heavy week of central-bank decisions and major corporate earnings.

The Federal Reserve is expected to announce its policy decision on July 29, while the Bank of England and the Bank of Japan follow later in the week. Those meetings will be important for the yen because expectations for U.S. and Japanese rate paths remain a key driver of the exchange rate.

Technology earnings will also remain central. Investors are awaiting results from Microsoft, Meta, Amazon and Apple after recent concern that AI spending by major U.S. technology companies could weigh on free cash flow. Strong cloud and AI guidance would help support Japanese suppliers, while disappointment could trigger renewed selling in Tokyo’s semiconductor complex.

Asian markets were mixed as investors weighed lower oil against continued caution over technology valuations. South Korean chip shares remain an important reference point for Tokyo because overseas investors have increasingly treated Japan and South Korea as a combined AI and memory-chip trade.

What to watch next: whether the Nikkei can build on the July 27 rebound and recover above 65,000, whether TOPIX strength continues, and whether the broad buying in domestic-demand and value shares can offset weakness in AI-related heavyweights.

Investors will also monitor Kioxia’s trading value and share-price stability, Advantest’s continued drag on the Nikkei, and whether Tokyo Electron, Lasertec, Disco and Taiyo Yuden can hold their gains.

The yen around 163.5 to the dollar remains a major risk. Any renewed move toward 164 or 165 could revive intervention speculation and increase pressure on the BOJ to sound more hawkish.

Oil will remain equally important. Brent’s fall toward $90 eased immediate inflation fears, but any renewed escalation around the Strait of Hormuz or Red Sea shipping routes could quickly reverse that relief.

The main domestic event is the BOJ’s July 30-31 policy meeting. Markets will focus on the outlook report, inflation forecasts, growth revisions, Governor Ueda’s comments on the yen, and whether the central bank signals that another rate increase remains likely later this year.

Source: CNBC

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