Japan's stock market experienced significant volatility on November 4 as news of the Democratic Party's victory in the U.S. midterm elections raised concerns about potential increased regulation of artificial intelligence (AI). This led to a sell-off, particularly in semiconductor stocks. The Nikkei average fell by more than 3,000 points at one point, nearing the 60,000 mark, before reducing its losses to close down 893 points (1.42%) at 62,188.63.
According to the Nihon Keizai Shimbun, the Nikkei average opened down 108 points and saw its losses deepen as vote counting progressed. Shortly after noon, reports that the Democrats regained a majority in the House intensified selling pressure. The index briefly dropped to 60,030, marking its lowest level in about six months.
Semiconductor stocks led the decline. Kioxia Holdings, a NAND flash manufacturer, fell by as much as 15%, while electronic components maker Daiyoyuden and semiconductor testing equipment firm Advantest dropped 15% and 10%, respectively. Stocks of general trading companies and automakers, which had shown strength in the morning, also reversed course in the afternoon. Junpei Tanaka, head of investment strategy at Pictet Japan, noted, "Selling spread beyond AI-related stocks to include cyclical stocks, indicating a broad risk-averse sentiment."
While many in the market believed the Democratic advantage was already priced in, the actual decline was steeper than expected. A trader from a foreign brokerage expressed to the Nikkei, "I had considered a scenario where stocks would rebound after the election, but this drop feels unsettling."
Market observers are particularly focused on how the Democratic gains might impact investments in U.S. data centers. During the election campaign, some Democratic candidates advocated for halting subsidies for data center construction. Hitoshi Asaoka, chief strategist at Asset Management One, analyzed that the Democrats not only performed well in the federal elections but also in gubernatorial races that influence data center construction permits. In Pennsylvania, Democratic Governor Josh Shapiro was re-elected. Shapiro has been proactive in attracting data center investments but has recently shifted to a more critical stance on development projects facing strong local opposition or perceived as speculative.
If data center construction slows in the U.S., it could have repercussions for Japanese semiconductor companies that have benefited from expanded investments. Takaki Hironaka, senior global strategist at Mizuho Securities, stated, "Investors now need to evaluate the profitability and costs of AI more critically." The Nikkei reported that concerns over credit instability among emerging AI cloud companies and doubts about the sustainability of big tech's AI investments have weighed on the stock market since last month. The Democratic advantage has compounded worries about stricter AI regulations.
However, the decline moderated in the latter part of the trading session. The Nikkei average briefly fell below the 200-day moving average, a key support level, for the first time in 1 year and 5 months. Nevertheless, it stabilized around that level, reducing its losses. Masashi Akutsu, chief Japanese equity strategist at Bank of America Securities, assessed that if President Donald Trump finds it difficult to push through new policies, market volatility may actually decrease, suggesting that the Japanese stock market's reaction was somewhat excessive.
Analysts also noted that the characteristics of trading during Asian hours may have amplified the decline. Before the U.S. market opens, liquidity in Japanese stocks can lead to concentrated selling. Kazuaki Shimada, chief strategist at Iwai Cosmo Securities, remarked that similar risk-averse selling has often occurred in Japanese stocks during past U.S. elections, indicating that it is premature to judge future trends based solely on a single day's movements.
* This article has been translated by AI.
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