TOKYO - Tokyo stocks fell sharply on July 16 as renewed selling in South Korean semiconductor shares spread to Japan’s AI and chip-related names, while household inflation expectations hit a record high and kept pressure on the Bank of Japan to maintain a tightening bias.
The Nikkei 225 Stock Average fell around 2.8% to close near 66,800, snapping the previous day’s rebound as investors again cut exposure to high-priced technology shares. The broader TOPIX declined about 1.5% to around 4,029, showing that the selloff spread beyond the Nikkei’s semiconductor-heavy names, although the strongest pressure remained concentrated in AI-related stocks.
Nikkei CNBC’s market framing centered on the renewed weakness in the regional semiconductor trade. South Korea’s Kospi tumbled after the Bank of Korea raised interest rates for the first time since 2023 in response to inflation pressure linked to the U.S.-Iran conflict. The move hit Samsung Electronics and SK Hynix, reviving the close short-term link between Tokyo and Seoul that has dominated trading this month.
Japanese chip shares followed South Korea lower. Kioxia plunged more than 13%, returning to the center of market attention after its recent attempts to stabilize above the 70,000 yen level. Tokyo Electron, Advantest and other semiconductor-related stocks also fell as investors questioned whether the AI-driven rally can resume while regional chip leaders remain under heavy pressure.
SoftBank Group also dropped sharply, weighing heavily on the Nikkei because of its large index impact. The stock has become a major proxy for investor appetite toward artificial intelligence infrastructure and OpenAI-related expectations, making it vulnerable whenever investors reduce exposure to the AI theme.
The yen traded around 162 to the dollar, still close to its weakest levels in about four decades. Softer U.S. inflation data gave the currency some support by reducing expectations of an imminent Federal Reserve rate increase, but the yen remained under pressure from Middle East tensions, high energy prices and uncertainty over how quickly the BOJ can raise rates.
Japanese government bond yields stayed below last week’s 30-year high but remained a major policy concern. The benchmark 10-year yield was around the upper 2.6% to low 2.7% range after reaching 2.865% last week. Former BOJ board member Seiji Adachi told Reuters that the government may see the 3% to 3.5% range as a critical line of defense and could pressure the BOJ to increase bond purchases if yields break above 3%.
The comments highlighted the difficult position facing policymakers. Higher yields support banks and insurers by improving investment income and lending margins, but they also raise government financing costs and could undermine confidence in Japan’s fiscal position. At the same time, if the BOJ moves too slowly, inflation and yen weakness could become harder to control.
Household inflation expectations added to the pressure. A BOJ survey showed 90.4% of households expect prices to rise over the next year, the highest level since comparable data began in 2006. The average expected price increase over the next year rose to 13.1%, while nearly half of respondents said they expect economic conditions to worsen.
The survey underscored how deeply inflation has entered household psychology. Price rises in daily necessities, fuel and imported goods have made consumers more sensitive to the weak yen and higher energy costs. TV Tokyo’s business coverage has continued to focus on this pressure on household budgets, wages and savings, especially as the economy moves further away from its deflation-era assumptions.
The BOJ is expected to keep interest rates steady at its July 30-31 meeting, but policymakers are likely to maintain a clear warning about upside inflation risks. BOJ Executive Director Koji Nakamura told parliament that delaying necessary adjustments to monetary support could allow price risks to materialize and weigh on the economy.
Domestic economic data also gave investors reason for caution. Japan’s core machinery orders plunged 12.4% in May from the previous month to 962.0 billion yen, far worse than market forecasts for a 4.2% decline. The drop, the steepest since December 2019, pointed to weakness in business investment intentions even as semiconductor-related demand remains strong in selected sectors.
The Reuters Tankan survey showed manufacturer sentiment unchanged at +13 in July, supported by semiconductor and AI server demand. However, non-manufacturer sentiment fell to +25 from +32 as the Middle East conflict, weak yen and rising interest rates pushed up costs. The split suggested that AI-related factories may still be busy, but the wider economy is feeling pressure from inflation and geopolitical risk.
Corporate movers reflected that divide. Semiconductor and AI-related names led the decline, with Kioxia, Tokyo Electron, Advantest and SoftBank Group heavily sold. Fujikura and other data-center-related component shares also weakened after recent gains. Banks were mixed as higher-rate expectations remained supportive, but the broader risk-off tone limited buying.
Toyota and other exporters were relatively better supported by the weak yen, but the benefit of currency weakness is becoming more complicated. A weaker yen lifts overseas earnings when converted into Japanese currency, but it also raises imported input costs and threatens household demand through higher prices.
Energy and resource shares remained in focus as oil prices stayed elevated because of U.S.-Iran tensions and disrupted tanker flows from the Persian Gulf. Brent crude traded around the mid-$80 range, still far above levels seen earlier in the year. For Japan, higher oil prices and a weak yen are a damaging combination because the country relies heavily on imported energy.
The global backdrop was mixed. Wall Street rose modestly after softer U.S. inflation data and stronger earnings from major financial companies, but Asian markets were weaker as South Korea’s rate hike and chip-stock declines hit sentiment. Hong Kong was an outlier, supported by gains in Alibaba after Chinese approval for Apple Intelligence integration using Alibaba’s Qwen model.
Investors are now watching Taiwan Semiconductor Manufacturing Co.’s earnings for confirmation of whether global AI chip demand remains strong enough to support valuations. ASML’s stronger outlook helped lift Tokyo shares on July 15, but the July 16 reversal showed that one positive earnings signal was not enough to calm concerns about regional semiconductor volatility.
The main points to watch next are whether Kioxia can recover from its latest drop, whether Samsung Electronics and SK Hynix stabilize after South Korea’s rate hike, whether the Nikkei can hold the mid-66,000 range, and whether the 10-year JGB yield stays comfortably below 3%.
Markets will also focus on TSMC earnings, the yen’s movement around 162 to the dollar, oil prices linked to the Strait of Hormuz, and the BOJ’s policy meeting at the end of July. For Tokyo investors, July 16 showed that Japan’s rally remains vulnerable whenever AI enthusiasm collides with inflation, rising rates and geopolitical risk.
