TOKYO - Tokyo stocks surged on July 31, with the Nikkei 225 closing at 64,362.02, up 2,494.59 points, as a sharp rebound in Asian semiconductor shares and strong U.S. technology earnings outweighed caution over the Bank of Japan’s decision to keep interest rates unchanged while warning that inflation risks remain tilted to the upside.
The broader TOPIX rose 50.80 points to 4,003.30, recovering the 4,000 level after several days of volatility. Prime Market volume reached about 3.21 billion shares, reflecting heavy trading as investors rebuilt positions after the previous week’s severe correction and the large swings earlier this week.
The rebound came after the Nikkei had been driven sharply lower by selling in artificial intelligence and semiconductor-related shares. The index rose strongly from the opening as investors reacted to a dramatic recovery in South Korea’s Kospi, which jumped after heavy losses in chipmakers earlier in the week, and to stronger sentiment toward U.S. technology shares following earnings from major AI-related companies.
Nikkei CNBC’s market framing centered on a powerful short-covering rally in the regional AI trade. Tokyo had been pulled down by South Korean semiconductor weakness earlier in the week, but the same cross-market relationship worked in reverse on July 31 as investors bought back Japanese chip equipment, memory, electronics and AI infrastructure names.
The Nikkei’s rise was also helped by the index’s heavy exposure to high-priced technology shares. When overseas investors return to semiconductor and AI-related positions, the price-weighted Nikkei tends to move more sharply than the broader TOPIX. The July 31 rally therefore reflected both improved risk appetite and the mechanical influence of large Nikkei components.
The TOPIX’s advance showed that buying was not limited to a narrow group of technology shares. Banks, electronics, industrials and selected domestic-demand names also recovered, supported by relief that the BOJ did not raise rates immediately and by expectations that Japan’s gradual shift toward higher rates will continue to benefit lenders.
The Bank of Japan kept its short-term policy rate at 1%, as widely expected, after raising rates in June to the highest level in 31 years. The decision was not unanimous. Board member Hajime Takata dissented, calling for a hike to 1.25% to respond to inflation risks from external demand shocks.
The hold was accompanied by a more hawkish message. In its quarterly outlook report, the BOJ warned for the first time that underlying inflation could exceed its 2% target. The central bank said medium- and long-term inflation expectations are rising and that companies are becoming more active in raising prices and wages.
Governor Kazuo Ueda said the BOJ must scrutinize upside price risks more closely because underlying inflation is approaching the 2% target. He said the central bank would debate policy from its next meeting with those risks in mind, keeping expectations alive for another rate increase later this year.
The BOJ also identified global AI-related demand and yen weakness as inflation risks. It said higher prices for semiconductors and other items linked to AI investment, together with the yen’s decline, could push up prices mainly for durable goods.
That language was important for equity investors because it tied Japan’s AI boom directly to the inflation outlook. Strong AI demand supports Japanese exporters, chip-equipment makers and component suppliers, but it can also raise input prices and strengthen the case for further monetary tightening.
The yen remained central to the day’s market reaction. The dollar hovered around 160 to 161 yen after Japan conducted yen-buying and dollar-selling intervention in New York trading on July 30. The move followed weeks of pressure on the currency above the 160 level and came before the BOJ decision.
The intervention gave the yen a sharp but limited boost. By the time of the BOJ announcement, the currency had already lost part of its gain, suggesting that traders remained skeptical that intervention alone can reverse the yen’s decline without clearer changes in interest-rate expectations.
Reuters reported that U.S. Treasury Secretary Scott Bessent said Japan may have intervened because the yen looked “very undervalued.” Tokyo’s top currency diplomat Atsushi Mimura declined to comment directly on intervention but indicated that Japan had been communicating closely with South Korea, which also conducted dollar-selling intervention.
The yen’s weakness remains a double-edged issue for Japanese markets. It supports exporters by lifting the yen value of overseas earnings, but it also raises import costs for energy, food, industrial materials and consumer goods. That makes the currency a direct burden for households and smaller companies.
Bond markets reacted to the BOJ’s hawkish hold. The two-year Japanese government bond yield rose after the decision, reflecting expectations that the central bank will continue raising rates even if it paused in July. Longer-term yields remained a focus because investors are sensitive to the fiscal cost of higher rates and to the government’s large investment and household-relief plans.
The central bank revised down its core inflation forecast for the current fiscal year ending in March 2027 to 2.5% from 2.8%, citing stabilizing oil prices. However, it raised its forecast for fiscal 2027 and said price risks were skewed to the upside.
The policy message was therefore not a simple pause. The BOJ is still moving toward tighter policy, but it wants more time to judge how yen weakness, AI-related demand, import costs and corporate price-setting behavior affect household inflation.
Corporate movers reflected the return of risk appetite. Electronics and semiconductor-related stocks led the rebound, helped by the recovery in South Korean chipmakers and strong U.S. technology earnings. Investors bought back names that had fallen sharply during the AI selloff, including chip-equipment, testing, electronic-component and data-center-related shares.
Kioxia Holdings remained one of the most closely watched stocks. The memory-chip maker has become a barometer of confidence in AI servers, high-bandwidth memory and data-center investment, but its recent extreme volatility has also exposed the risk of crowded and margin-financed positions.
Reuters reported after the close that Kioxia forecast a large increase in quarterly operating profit as AI demand remained strong. The result will be watched closely when trading resumes because investors want to know whether strong earnings can overcome concerns about valuation, leverage and competition in memory chips.
SoftBank Group also remained central to the Nikkei’s direction because of its large index weighting and its role as a proxy for global AI investment sentiment. The stock tends to amplify moves in the Nikkei when investors shift quickly between enthusiasm and concern over artificial intelligence infrastructure.
Advantest, Tokyo Electron, SCREEN Holdings, Kokusai Electric and related semiconductor equipment names were also key to the rebound. The sector had been sold heavily on concern that AI capital spending might be peaking or that expectations had become too optimistic, but stronger global technology earnings helped ease those fears.
Banks were supported by the BOJ’s continued tightening bias. A higher interest-rate environment can improve lending margins and investment income for major banks and regional lenders, even though rapid yield increases can also create valuation losses on bond holdings.
The broader market benefited from the fact that the BOJ did not surprise investors with an immediate rate hike. Domestic-demand shares, services and selected consumer names recovered as traders judged that monetary tightening would remain gradual rather than abrupt.
Policy and household-economy issues remained important. Tokyo consumer price data released on July 31 showed core inflation in the capital accelerating to 1.7% in July, a sign that price pressure is broadening even before the full effect of yen weakness and recent energy volatility is felt.
For households, the weak yen continues to raise the cost of imported food, fuel, electricity and daily necessities. Wage growth has improved, but higher prices are still eroding purchasing power for many consumers, especially if companies pass on more of the increase in wholesale and import costs.
TV Tokyo’s business coverage has continued to focus on this divide between wage increases and the real cost of living. Families are facing higher grocery, utility and transport bills, while companies are balancing labor shortages, cost increases and the limits of consumer tolerance for further price hikes.
The government is considering measures to ease household pressure, including possible relief on food-related consumption tax. Such steps could support consumer spending, but investors remain concerned about how lost revenue would be replaced at a time when Japan’s debt burden is already under scrutiny.
Prime Minister Sanae Takaichi’s administration is also pursuing a growth strategy built around more than 370 trillion yen in public and private investment through fiscal 2040. The plan targets semiconductors, artificial intelligence, energy security, defense, shipbuilding, robotics, space and other strategic industries.
The BOJ’s July 31 message shows the tension in that strategy. Strong investment in AI and semiconductors can raise Japan’s growth potential, but if it also fuels inflation and pushes up interest rates, the government will need to maintain market confidence in fiscal discipline.
The global backdrop improved sharply for technology shares. Reuters reported that South Korea’s Kospi surged as much as 17%, its strongest single-day move on record, after a severe selloff earlier in the week. Taiwan also rallied, and Japan’s Nikkei rose more than 5% at one stage.
U.S. technology earnings helped drive the recovery. Strong results from Amazon and Sony supported confidence in AI and technology demand, while Microsoft’s earlier gains helped ease concern that large-scale AI spending was becoming a burden rather than a growth engine.
Apple’s outlook was less encouraging because chip-supply constraints weighed on revenue expectations, reminding investors that the AI and semiconductor cycle remains uneven. The market is now distinguishing more carefully between companies that benefit directly from AI infrastructure demand and those that must spend heavily before seeing returns.
Oil prices eased, giving Japan some relief after weeks of concern over Middle East supply routes. Brent crude and U.S. crude both fell as traders focused on actual supply flows rather than worst-case scenarios involving the Strait of Hormuz and Red Sea shipping.
For Japan, lower oil helps reduce the risk of another immediate inflation shock. However, the benefit is partly offset by the weak yen because energy imports are priced largely in dollars.
What to watch next: whether the Nikkei can hold above 64,000 after the July 31 rebound, whether TOPIX remains above 4,000, and whether the recovery in semiconductor and AI-related shares continues when investors digest Kioxia’s earnings forecast.
Markets will also monitor whether the yen stabilizes near 160 to the dollar or weakens again toward intervention-sensitive levels. Any renewed slide could increase pressure on the Ministry of Finance and raise expectations that the BOJ will move faster.
The BOJ’s September and October meetings will become more important after the July 31 hawkish hold. Investors will focus on whether Ueda’s warning about upside inflation risks turns into a clearer signal for another rate increase.
Other key factors will be the two-year and 10-year JGB yields, oil prices, U.S. technology earnings and South Korean semiconductor shares. July 31 showed that Tokyo’s AI trade can rebound sharply, but the recovery now depends on whether earnings, currency stability and BOJ policy can move in the same direction.
Source: CNBC
