TOKYO - Japan's financial markets suffered another sharp setback on October 22 as heavy selling in semiconductor and artificial intelligence-related stocks sent the Nikkei 225 down 1,713.40 points, or 2.65%, to 62,907.84, its lowest closing level since July 30.
The decline came despite gains on Wall Street overnight and renewed hopes for stronger corporate earnings, while the government considered restoring electricity and gas subsidies to protect households from rising energy costs and the Bank of Japan reported continued strength in corporate borrowing demand.
The broader TOPIX index fell 46.23 points, or 1.14%, to 3,997.50, slipping below the 4,000 mark as investors reduced their exposure to equities following a brief recovery the previous day. The substantially smaller decline in TOPIX underscored the extent to which a handful of heavily weighted technology companies were responsible for the Nikkei's losses.
The market had entered the session with expectations of a recovery after U.S. stocks advanced on October 21. The Dow Jones Industrial Average climbed 360.21 points to 52,856.09, while the technology-heavy Nasdaq Composite gained 278.04 points to 26,702.86. Strong results from U.S. space and technology companies initially helped ease concerns about the profitability of AI investment, while lower crude oil prices provided additional support.
However, renewed uncertainty over semiconductor demand and the financial burden of expanding AI infrastructure quickly undermined sentiment in Tokyo.
The Nikkei opened 81.88 points lower at 64,539.36 before briefly rising as high as 64,866.44. The early recovery failed to attract sustained buying, and the index began retreating as semiconductor-related stocks came under pressure. By the midday break, it had fallen 703.81 points to 63,917.43, while TOPIX was down 11.51 points at 4,032.22.
Selling intensified during the afternoon, pushing the Nikkei to its lowest level of the session at the close. The index had risen 545.82 points on October 21, when bargain hunting briefly lifted it above 65,400, but the latest decline more than erased that recovery.
Advantest, Tokyo Electron and SoftBank Group were among the principal contributors to the fall. Together, the three companies accounted for an estimated 1,110 points, or approximately 65% of the Nikkei's decline, reflecting the significant influence of technology stocks on the price-weighted benchmark.
Advantest, a manufacturer of semiconductor testing equipment, has been particularly sensitive to changes in expectations for AI chip demand. Tokyo Electron, one of Japan's largest semiconductor manufacturing equipment suppliers, was also affected by concerns over investment spending by global chipmakers. SoftBank Group remained vulnerable to changing valuations of AI-related companies and questions about the long-term returns on large technology investments.
The selling followed a disappointing market reaction to earnings and forecasts from U.S. semiconductor equipment maker Lam Research. Although its outlook for the October-December quarter was broadly consistent with analyst expectations, investors had anticipated stronger growth, contributing to renewed caution toward the sector.
Other Japanese technology shares, including Kioxia Holdings, Ibiden, Disco, Resonac Holdings and Screen Holdings, faced selling pressure as investors reassessed the pace of expansion in AI-related manufacturing and data center infrastructure.
The latest downturn highlighted growing tension between strong underlying demand for semiconductor products and increasingly demanding equity valuations. Companies supplying advanced memory chips, electronic components and semiconductor production equipment continue to benefit from investment in AI systems, but investors have become less willing to assume that rapid growth will continue indefinitely.
The divergence between the Nikkei and TOPIX was particularly pronounced. While the Nikkei lost 2.65%, TOPIX declined 1.14%, indicating that the market retreat was significantly concentrated in major technology shares rather than distributed equally across Japanese companies.
The pressure on Japanese technology stocks came against a broader backdrop of geopolitical uncertainty, with oil prices rising again on concerns about renewed military confrontation in the Middle East. Reports that U.S. authorities were preparing evacuation orders for embassy personnel in parts of the Gulf region contributed to fears of further disruption to energy supplies.
Oil prices rose by roughly 3% during international trading as developments involving Iran and attacks affecting Saudi Arabia renewed concerns over the availability and transportation of crude. Higher energy prices represent a substantial risk for Japan, which remains heavily dependent on imported oil and natural gas.
The resulting pressure on businesses and households has placed energy policy back at the center of the government's economic agenda.
Prime Minister Sanae Takaichi's administration is considering reintroducing subsidies for electricity and gas bills from December to cushion consumers against persistently high living costs. The previous assistance program, introduced in response to the surge in imported energy costs following Russia's invasion of Ukraine, expired in September after costing approximately 5.6 trillion yen.
The government is examining whether to finance renewed assistance through existing budget reserves or a supplementary budget. Chief Cabinet Secretary Minoru Kihara indicated that the administration remained open to the proposal, although the scale and duration of any new subsidies had not been determined.
The proposed measures would provide temporary relief to households and businesses facing higher utility bills, particularly small manufacturers, restaurants and service providers with limited ability to pass increased costs on to customers.
However, the plan raises concerns about additional pressure on public finances. Japan already has the highest public debt burden among major advanced economies, and renewed energy subsidies would add to spending commitments as the government prepares other measures intended to support consumption and economic growth.
The International Monetary Fund has recommended targeted and temporary assistance rather than broad energy subsidies, arguing that blanket support can impose substantial fiscal costs while weakening incentives to conserve energy.
The subsidy discussions also come as the government prepares a two-year reduction in the consumption tax on food, scheduled to begin in April 2027. The administration argues that lower household costs will help support consumption and the transition toward sustainable growth, although economists have questioned how the measures will be financed without adding to inflationary pressures.
Japan's trade statistics reinforced the urgency of the energy issue. Figures released on October 21 showed that the country recorded a trade deficit of approximately 536.6 billion yen in September, marking a fifth consecutive monthly shortfall despite a substantial increase in exports.
Exports climbed 16.7% from a year earlier to 10.9723 trillion yen, extending their growth streak to 13 months. However, imports increased more rapidly, rising 18.9% to 11.5088 trillion yen as higher energy costs and demand for semiconductor-related products pushed up the import bill.
Shipments of semiconductors and other electronic components increased 49.4%, while exports of semiconductor manufacturing equipment rose 43.9%. Automobile exports gained 15.1%, supported by continued overseas demand.
Exports to the United States increased 22.9%, while shipments to China rose 8.6%, illustrating the continuing importance of the two economies to Japanese manufacturers.
Despite the strong headline export figures, growth slowed from August's 19.3% increase, and the September trade deficit was significantly larger than the approximately 181 billion yen shortfall expected by economists.
For the April-September period, Japanese exports rose 18.4% to a record 63.4569 trillion yen, while imports jumped 20.4% to 66.2753 trillion yen, also a record. The resulting trade deficit reached 2.8184 trillion yen, roughly double the shortfall recorded a year earlier.
Crude oil imports during the six-month period increased 26.3% to 5.7439 trillion yen as Japan sought alternative supplies and transportation routes in response to disruptions in the Middle East.
The figures illustrated a fundamental challenge confronting the Japanese economy. Strong global demand for AI-related equipment and automobiles is supporting exports, but higher energy costs and imported components continue to absorb a substantial portion of those gains.
Currency markets also experienced significant volatility as investors sought safer assets in response to the equity sell-off and renewed geopolitical tensions. The yen traded around 158.16 to the dollar during the Tokyo morning session, little changed from the previous day, before strengthening in international trading to around 156.96, its largest daily gain in nearly a month.
The yen's recovery reflected a combination of reduced appetite for risk, expectations of further monetary tightening by the Bank of Japan and continued speculation that Japanese authorities could intervene in foreign exchange markets if the currency weakened toward 160 to the dollar.
The euro faced additional pressure from political and fiscal uncertainty in France, where rising government bond yields and widening spreads against German debt added to concerns about European financial stability. The combination of geopolitical risks and uncertainty over AI-related equity valuations encouraged investors to shift funds away from riskier assets.
Japan's government bond market remained sensitive to expectations for monetary policy. The benchmark 10-year Japanese government bond yield was around 2.89% on October 22, compared with approximately 2.88% the previous day. Although yields have eased from levels above 3% earlier in October, borrowing costs remain significantly higher than a year earlier.
A Bank of Japan survey released on October 22 suggested that corporate financing conditions remain relatively accommodative despite the central bank's successive interest rate increases. Demand for loans from major banks strengthened over the previous three months, with the diffusion index measuring corporate borrowing demand rising to plus 3 from minus 1.
The figures indicate that companies continue to seek financing for capital investment, working capital and other business requirements despite higher borrowing costs. The results also suggest that monetary tightening has yet to significantly constrain lending activity across the economy.
The Bank of Japan raised its benchmark interest rate to 1.25% in September, the highest level in 31 years, as it sought to contain inflation and stabilize the yen. The latest lending survey could strengthen the case for additional increases if wage growth and domestic demand remain resilient.
Economists are examining whether the central bank could eventually lift rates beyond 1.75%, although the timing and extent of further tightening remain uncertain. Higher interest rates could help reduce imported inflation by supporting the yen, but would also increase financing costs for businesses and households.
Smaller companies are particularly exposed because they often have limited financial reserves and greater dependence on bank borrowing. For businesses already facing higher wages, raw material prices and energy bills, additional interest expenses could place further pressure on profitability.
The central bank's next monetary policy meeting will therefore be closely watched for changes in its assessment of inflation, economic growth and financing conditions. Economy Minister Minoru Kiuchi is expected to attend the meeting, with investors also assessing the relationship between the government's fiscal policies and the central bank's efforts to restrain inflation.
Finance Minister Satsuki Katayama said Japan is moving toward an economic environment in which inflation is increasingly supported by wage increases rather than solely by higher import prices. The transition is important for the Bank of Japan's longer-term objective of achieving sustainable inflation accompanied by stronger household incomes.
However, the relationship between wages and prices remains complicated by the recent energy shock. Rising oil and gas costs can reduce household purchasing power even when nominal wages are increasing, while companies face difficult decisions about how much of their higher expenses to pass on to customers.
Government plans to reduce consumption taxes and provide additional energy assistance could help sustain domestic spending, but they may also complicate monetary policy if the measures generate additional demand before supply constraints have eased.
Japanese financial institutions are simultaneously expanding overseas technology operations as competition intensifies in digital banking and financial services. Major banks and online lenders are establishing or enlarging information technology development operations in India, taking advantage of the country's engineering workforce and growing capabilities in artificial intelligence.
Mitsubishi UFJ Financial Group is developing AI-related technology operations in Bengaluru, part of a broader move by Japanese financial institutions to strengthen software development, data analysis and digital services.
The expansion reflects increasing pressure on banks to modernize their systems while controlling operating expenses. AI applications are being developed for customer services, internal operations, risk management and other functions, although financial institutions must also address regulatory requirements and concerns over data security.
In another significant overseas investment development, Japan is preparing to facilitate approximately 1 trillion yen in private-sector investment in Bangladesh over the next five years, according to a report by Nikkei on October 22.
The initiative is expected to focus on automobile manufacturing, industrial development and energy infrastructure as Japanese companies seek additional production bases and opportunities in South Asia. Sumitomo Corp. is among the Japanese businesses expected to participate in the Bangladesh Special Economic Zone, which is being developed to attract foreign manufacturers.
The investment plan is expected to feature in discussions between Prime Minister Takaichi and Bangladesh Prime Minister Tarique Rahman during a summit in Japan. A joint statement outlining the initiative is expected, although the precise arrangements and individual investment commitments have not been finalized.
The proposed expansion illustrates efforts by Japanese companies to diversify manufacturing operations and strengthen supply chains beyond their established production networks in China and Southeast Asia.
Bangladesh offers a large domestic labor force and potential access to growing South Asian markets, although investors must also consider infrastructure requirements, energy supplies and the broader operating environment.
Japan's overseas industrial investment strategy is also taking shape through a major semiconductor manufacturing arrangement with the United States. Under a broader bilateral investment agreement valued at $550 billion, Japan has agreed to provide funding of up to $21 billion for two semiconductor factories to be operated by GlobalFoundries in New York.
The investment forms part of an arrangement intended to support semiconductor production in the United States while addressing trade and tariff concerns between the two countries.
GlobalFoundries, which is controlled by Abu Dhabi's Mubadala, is expected to provide technology and oversee construction and operations, while Japan would supply much of the financial backing.
The financial terms have attracted attention because Japan would bear substantial investment risk while the United States would receive a large share of profits after Japan recovers its investment and interest.
An October 22 Reuters Breakingviews analysis estimated that the projects would need to generate annual returns of at least 13% for Japan to break even under the proposed arrangements. That compares with GlobalFoundries' average pretax return on invested capital of approximately 10.4% over the previous five years.
Despite questions over the direct financial returns, the investment could provide strategic advantages by strengthening semiconductor supply chains and supporting demand for Japanese manufacturing equipment, materials and electronic components.
Automakers could also benefit from more diversified access to semiconductors, particularly as advanced vehicles become increasingly dependent on chips for electronic control systems, driver assistance and connectivity.
The announcement comes at a time when Japanese semiconductor companies face conflicting pressures. Strong international investment in chip manufacturing continues to support long-term demand for production equipment, but equity investors are increasingly concerned about the costs, valuations and uncertain returns associated with major technology projects.
Domestically, Japan's Fair Trade Commission and relevant government agencies are preparing nationwide investigations into unfair treatment of smaller suppliers, with the transportation industry identified as an initial focus.
The initiative is intended to address business practices in which larger companies impose excessive cost pressures on subcontractors or fail to adequately reflect higher wages and operating expenses in contractual payments.
Transportation companies have been particularly affected by labor shortages, rising fuel costs and regulatory changes affecting working hours. The investigations are expected to examine whether commercial relationships allow smaller operators to negotiate appropriate compensation for increased expenses.
The measures form part of wider efforts to improve the distribution of profits across supply chains and create conditions in which smaller businesses can increase wages without jeopardizing their financial stability.
The developments underline the importance of corporate investment and industrial competitiveness to Japan's economic outlook. While global demand for semiconductors, automobiles and advanced manufacturing equipment remains a major source of growth, higher energy costs, tighter monetary policy and pressure on smaller businesses continue to complicate the recovery.
For financial markets, attention is turning to the next round of Japanese corporate earnings, overseas semiconductor industry forecasts and upcoming decisions by the Bank of Japan and the U.S. Federal Reserve.
Investors will also be assessing whether the government can deliver meaningful household relief while maintaining confidence in public finances, and whether continued investment in AI infrastructure will translate into sufficient earnings growth to justify elevated technology stock valuations.
