Nikkei Nearly Erases 1,500-Point Drop as TOPIX Extends Winning Streak

The session began with a sharp selloff after Federal Reserve Chair Kevin Warsh’s Jackson Hole speech strengthened expectations that U.S. interest rates could rise again. The Nikkei dropped below 65,000 soon after the open, but buying emerged around that level and the index recovered steadily through the day, finishing at its intraday high.

The rebound from the morning low was nearly 1,500 points, showing that investors were still willing to buy Japanese shares on weakness despite higher U.S. yields, a weak yen, Middle East concerns and renewed selling pressure in U.S. technology stocks.

The TOPIX’s eighth consecutive gain was especially important because it showed that the broader market remained more resilient than the Nikkei’s headline decline suggested. While the Nikkei was dragged down by high-priced semiconductor and artificial intelligence-related shares, buying continued in banks, automakers, utilities, communications and selected domestic-demand stocks.

Prime Market trading value totaled about 6.2638 trillion yen, remaining relatively thin by recent standards. Even so, nearly 60% of Prime Market stocks rose, showing that the underlying market tone was firmer than the Nikkei’s negative close implied.

Nikkei CNBC-style market commentary centered on the contrast between the severe early drop and the strong recovery into the close. The morning selloff reflected U.S. rate fears and selling in high-tech shares, but the afternoon rebound suggested that medium- and long-term investors may be buying areas outside the crowded AI and semiconductor trade.

The Nikkei has repeatedly shown a pattern over the past week of weakening early and then recovering before the close. On August 31, that pattern became more striking, with the index rebounding almost continuously after hitting its low at 9:06 a.m.

Market participants pointed to possible systematic and trend-following buying as one reason for the recovery. JP Morgan quantitative analysis cited in market commentary suggested that the average cost of CTA trend-following positions in Nikkei futures since May was around 65,400. That level appeared to provide support when the index fell toward the mid-65,000 range.

The same analysis suggested that another layer of support may lie near 59,300, the average purchase level for trend-following players since January. For now, the market remains in a zone where many systematic investors who bought the rally since May may still be comfortable holding or adding positions.

MSCI-related flows may also have supported the market. August 31 marked implementation of index changes by the U.S. index provider, including the addition of Kokusai Electric and the removal of JFE Holdings, while Kioxia’s higher free-float ratio was expected to bring in additional buying. Market estimates put the net inflow from these changes at about 220 billion yen.

That amount is not large relative to Prime Market turnover, but it may have provided a helpful supply-demand factor at a time when trading volume was thin. The combination of index-related buying and trend-following support appeared to help the market absorb the morning shock.

Warsh’s Jackson Hole comments were the main overseas trigger. Investors had hoped the Federal Reserve might sound more cautious after signs of uneven U.S. growth, but Warsh emphasized that inflation remains the central priority and described financial conditions as not particularly restrictive.

That message was interpreted as hawkish because it suggested that the Fed may still see room to raise rates if inflation remains sticky. U.S. long-term yields rose, the dollar strengthened and high-growth technology shares came under pressure.

Market commentary focused on the idea that U.S. financial conditions remain loose partly because of the strength in equities. If rising stock prices support household wealth, consumption and corporate risk-taking, they may make it harder for the Fed to bring inflation down. That logic raises the risk that the Fed may be less willing to protect equity markets if inflation stays elevated.

The comparison with 2022 remained in investors’ minds. If the Fed decides that inflation must be suppressed even at the cost of weaker markets, high-valuation growth stocks could face renewed pressure. For Tokyo, that risk matters directly because Japanese semiconductor and AI shares are closely linked to U.S. technology valuations.

Higher rates are especially negative for AI and semiconductor shares because many of these companies trade on expectations for strong future earnings. When bond yields rise, investors become less willing to pay high valuations for profits expected several years ahead.

That pressure hit Japanese chip-related shares hard in early trading. Advantest fell sharply and was reported to have subtracted hundreds of points from the Nikkei at one stage. Tokyo Electron, SoftBank Group, Taiyo Yuden, Murata Manufacturing, Mitsubishi Heavy Industries and other high-profile growth or technology-related names also came under pressure.

The Philadelphia Semiconductor Index had fallen sharply in the previous U.S. session, adding to selling pressure in Tokyo. Investors have increasingly treated Japanese chip-equipment makers, South Korean memory producers, Taiwanese foundries and U.S. AI shares as part of one global technology trade. When U.S. semiconductor stocks fall, Tokyo’s AI complex often reacts quickly.

Kioxia Holdings was the most actively traded stock on the Prime Market by value and became a key symbol of the day’s recovery. The stock was weak early but turned positive and finished at its high for the day, helped by buying linked to MSCI index adjustments and continued attention to high-bandwidth memory and AI server demand.

Kioxia remains one of Tokyo’s clearest gauges of confidence in the memory side of the AI cycle. Its recovery on August 31 helped reduce pressure on the broader market, even though semiconductor sentiment remained uneven.

Fujikura was also closely watched. The company represents the second wave of the AI trade, tied to optical fiber, high-speed networks, cables and data-center infrastructure. Its movements have become important because investors are testing whether AI-related buying can broaden beyond chipmakers and equipment makers into infrastructure suppliers.

SoftBank Group remained a key drag on the Nikkei. The company is one of Tokyo’s most visible proxies for global AI investment sentiment because of its exposure to OpenAI, robotics, digital infrastructure and other large-scale technology themes. Its large index weighting means any weakness has an outsized impact on the Nikkei.

Advantest remained the most important single chip-testing name. The stock has benefited from demand for advanced semiconductor testing used in AI processors, but it is also highly vulnerable to profit-taking whenever investors become worried about valuations or U.S. interest rates.

Tokyo Electron’s weakness reflected caution toward semiconductor-equipment spending. Nvidia’s recent earnings confirmed strong AI demand, but investors are still debating how much of that demand will translate into sustainable orders for equipment, materials and components across the entire supply chain.

The August 31 session showed that Nvidia’s strong outlook is no longer enough by itself to lift all Japanese AI-related names. Investors are becoming more selective, distinguishing between companies with direct order growth, those exposed to speculative positioning, and those whose valuations may already reflect years of optimism.

Outside the AI trade, the market was much steadier. Toyota, NTT and Sony Group were among the large names showing strength early in the day, helping cushion the broader market. Their resilience supported the TOPIX and reinforced the view that Japan’s equity market is not only a semiconductor story.

Automakers continued to attract buying. Market participants said money appeared to be shifting into lagging large-cap names after strong earnings confirmed the positive effect of the weak yen. Toyota and other automakers remain sensitive to currency movements, global demand and trade policy, but a dollar near 160 yen continues to provide earnings support for exporters.

Telecommunications shares also provided stability. NTT and other defensive or domestic-demand names can attract buying when investors reduce exposure to high-growth technology shares. Their cash-flow stability becomes more attractive when volatility rises.

Banks and insurers remained supported by expectations that Japan’s interest-rate environment will continue normalizing. Mitsubishi UFJ Financial Group rose for a fifth straight session, reflecting continued investor interest in banks as beneficiaries of higher rates.

Higher rates can improve bank lending margins and investment income, although the sector remains sensitive to sudden moves in JGB yields and the valuation of financial institutions’ bond holdings. On August 31, banks offered one of the clearest alternatives to AI-related shares.

Utilities also stood out, with electric power and gas shares among the stronger sectors. Their resilience added to the impression that investors were rotating into areas with more stable earnings or defensive characteristics while high-growth technology shares came under pressure.

Casio Computer renewed its year-to-date high after a report that it plans to increase watch dealers in India by 70% as it strengthens efforts to capture demand from middle-class women. The move highlighted investor interest in companies that can expand overseas consumer markets rather than relying only on inbound demand in Japan.

Casio’s G-Shock and other watches remain popular overseas, and the company’s India strategy may give investors a longer-term growth story tied to demographics, rising incomes and brand appeal in emerging markets.

Ichibanya surged to its daily limit after a report that House Foods Group is considering selling the curry restaurant operator. The report triggered buying on expectations that a sale could improve capital efficiency and help resolve parent-subsidiary listing issues.

House Foods also rose sharply. Market commentary connected the Ichibanya report to a broader theme of Japanese companies selling cross-shareholdings or subsidiaries to improve return on equity, fund shareholder returns or finance growth investment.

That theme has become increasingly important in Japan’s equity market. Investors are rewarding companies that unwind strategic shareholdings, improve capital efficiency and return excess capital to shareholders. Similar logic has supported shares of regional banks and other companies with large holdings of listed securities.

Goldman Sachs was cited in market commentary as identifying companies with strategic shareholdings exceeding 15% of assets and a record of large-scale sales as potential beneficiaries of further unwinding. The market is increasingly treating governance reform and balance-sheet restructuring as investable themes.

Shares that are sold by parent companies can initially face supply-demand pressure, but market participants noted that they often recover later if the sale improves governance, liquidity or shareholder alignment. The Ichibanya move reflected that logic.

The yen remained near 160 to the dollar, keeping currency policy at the center of the market story. The Japanese currency has surrendered much of the gain it made after the rare joint U.S.-Japan yen-buying intervention in late July, leaving investors focused on whether authorities will act again.

U.S. Treasury Secretary Scott Bessent said recent yen moves appeared fairly contained and not disorderly, reducing immediate expectations for another intervention. That comment was important because the previous joint intervention carried more weight precisely because Washington was involved.

Bessent also said he expected BOJ Governor Kazuo Ueda to do the right thing on monetary policy. Markets interpreted that as a signal that the United States may prefer Japanese rate increases over repeated currency intervention as the main tool for reducing yen weakness.

That creates pressure for the BOJ. The central bank kept its policy rate at 1% at its July 30-31 meeting, but board member Hajime Takata dissented in favor of raising it to 1.25%. Since then, inflation indicators, bond yields and yen weakness have strengthened expectations that another rate increase could come at the September 17-18 meeting.

The yen’s weakness remains a double-edged factor for equities. It supports exporters by increasing the yen value of overseas earnings, but it raises import costs for fuel, food, raw materials, chemicals and consumer goods. For households, the currency’s weakness is felt directly through groceries, gasoline, electricity, transport and everyday services.

The pressure on the BOJ is not only coming from the currency. Japan’s 10-year government bond yield rose to about 2.95% on August 31, its highest level in roughly 30 years. That put the market close to the psychologically important 3% threshold.

A 10-year yield near 3% would mark a major change in Japan’s financial environment after decades of ultra-low rates. Higher yields affect equity valuations, corporate borrowing costs, mortgage rates and the government’s debt-servicing burden.

The bond-market move was especially important because August 31 was also the deadline for ministries and agencies to submit budget requests to the Finance Ministry for the next fiscal year. Markets are watching whether total requests set another record and whether spending plans worsen concern over fiscal discipline.

Reuters has reported that budget requests from ministries and agencies are expected to exceed 130 trillion yen, which would mark a record for a fourth consecutive year. The Finance Ministry is also requesting a record 36.64 trillion yen for debt-servicing costs in the fiscal 2027 budget, reflecting higher bond yields.

The ministry is considering an assumed interest rate of 3.8% for calculating debt-servicing costs, the highest in 29 years. That figure matters because it shows how quickly higher market rates are beginning to affect fiscal planning.

Prime Minister Sanae Takaichi’s government is trying to balance three objectives: supporting households facing higher prices, maintaining fiscal credibility and promoting long-term strategic investment. Each objective is politically important, but the bond market is becoming less forgiving.

Takaichi aims to cap new government bond issuance at around 40 trillion yen for fiscal 2027, even as spending demands rise. Markets will judge whether that target is credible once the budget-request process reveals the scale of pressure from defense, social security, debt service, subsidies and strategic investment.

The government’s long-term economic strategy calls for 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.

That investment agenda supports many of the companies investors like, including chip-equipment makers, advanced materials suppliers, data-center infrastructure firms, power-system companies and defense-related manufacturers. However, rising yields mean the market is paying more attention to how the program will be financed.

Household relief is another fiscal challenge. The government has discussed food-related support and possible tax relief to cushion consumers from inflation. Such measures could help spending, but without clear replacement revenue they may increase concern over deficits and debt issuance.

Japan’s economic data released on August 31 gave investors a mixed picture. Industrial production rose 0.1% in July from the previous month, beating expectations for a decline but slowing sharply from June. The data suggested that manufacturing remains resilient, helped by automobiles, electronic components and semiconductors, but growth momentum is not strong.

Retail sales rose 4.0% from a year earlier in July, more than expected and much faster than June’s increase. The figures suggested that steady wage growth and government utility subsidies helped support consumption despite persistent inflation.

The retail-sales data were encouraging because private consumption had been a weak point in recent GDP figures. Japan’s April-June economy grew for a third straight quarter, but household spending slipped and capital spending weakened. A better retail figure for July suggests consumption may be stabilizing, but it does not remove concern over real purchasing power.

For households, inflation remains the key issue. Wage gains have improved, but many consumers continue to face higher prices for food, electricity, gasoline, transport and services. Government subsidies have helped, but subsidies do not solve the underlying pressure from a weak yen, imported energy and labor costs.

TV Tokyo’s broader business themes remain closely connected to this market. Companies are still deciding how much of their higher labor, logistics, energy and materials costs can be passed on to consumers. Households, meanwhile, are judging the economy by whether pay increases actually cover daily expenses.

Businesses with pricing power, strong brands, recurring demand or exposure to structural investment remain better positioned. Firms without pricing power remain vulnerable if the yen weakens again, oil rises further or wage costs continue increasing.

Oil prices added another layer of concern. Reuters reported that Asian markets eased as oil climbed and yields stayed high. Brent crude moved back toward the low-$90 range after reports of U.S. strikes on Iranian launchers on Larak Island and continuing tension around the Strait of Hormuz.

For Japan, higher oil is a direct inflation risk because the country imports most of its energy. Rising crude prices feed into gasoline, electricity, airline fuel, logistics, chemicals and manufacturing. The impact becomes stronger when the yen is near 160 to the dollar.

Energy costs also affect investor psychology. Higher oil may lift resource-related shares such as Inpex, but it is negative for the broader economy, especially households, airlines, utilities, retailers and smaller manufacturers.

The global backdrop remained fragile. U.S. markets had turned cautious after Warsh’s Jackson Hole speech, while Asian markets were mixed. China’s official manufacturing PMI improved to 49.8 in August from 49.2 in July, but it remained below the 50 line that separates expansion from contraction.

China’s data showed some stabilization in manufacturing demand and output, but weak services activity suggested the recovery remains uneven. For Japan, China still matters through exports, machinery, materials, tourism and sentiment toward Asian equities.

South Korea remained an important reference point for Tokyo. The Kospi showed some recovery during the day, helping reduce selling pressure in Japanese AI-related names. The link between South Korean memory stocks and Japanese semiconductor shares remains strong because overseas investors treat the region’s chip supply chain as one connected trade.

The August 31 session also showed that month-end flows can exaggerate moves. Institutional rebalancing likely added selling pressure in the morning, when the Nikkei dropped more than 1,500 points. Once those flows eased, South Korea stabilized and domestic buyers stepped in, the market recovered sharply.

That pattern matters for September. Market participants are watching whether the recent buying in non-AI semiconductor areas continues after month-end, or whether it was mainly a temporary flow tied to index adjustments and thin late-summer trading.

The U.S. employment report will be watched, but market commentary suggested that next week’s U.S. producer price and consumer price data may be even more important for the September rate outlook. Warsh has emphasized that inflation remains the Fed’s main concern, so a slightly weaker jobs figure may not be enough to change policy expectations if price data stay firm.

What to watch next: whether the Nikkei can hold above 66,000, whether TOPIX can extend its eight-day winning streak, and whether semiconductor selling in Advantest, Tokyo Electron, SoftBank Group, Kioxia, Fujikura and related names stabilizes.

The yen near 160 to the dollar remains one of the most important macro signals. A clear move beyond 160 would revive intervention speculation and strengthen expectations that the BOJ may raise rates in September.

The 10-year JGB yield near 2.95% is another key threshold. A move above 3% could increase pressure on equity valuations, fiscal policy and the government’s budget process. A retreat would help support risk appetite, especially in technology shares.

Investors will also monitor the budget-request totals, comments from Finance Minister Satsuki Katayama at the G20 meeting, any signals from BOJ Governor Ueda, U.S. jobs data, U.S. PPI and CPI figures, and the September 17-18 BOJ meeting.

August 31 showed that Tokyo’s market remains supported by bargain buying, TOPIX strength and possible medium-term money moving outside the AI semiconductor trade, but the Nikkei is still vulnerable when U.S. rate expectations, yen weakness, JGB yields and AI-share volatility all move against investors at the same time.

Source: CNBC