Japan's Nikkei average has recorded its third-largest drop in history, falling below the 60,000 mark. The index has declined more than 20% from its all-time high in June, surpassing the typical threshold for a bear market. Concerns are growing that the Democratic Party's decisive victory in the U.S. midterm elections could lead to stricter regulations on artificial intelligence (AI), potentially slowing investments in data centers. The shock from the steep decline in U.S. tech stocks has spread to the Tokyo market, prompting a sell-off that extended beyond AI and semiconductor stocks.
On November 6, the Nikkei average closed at 57,434.77, down 3,643.13 points (5.96%) from the previous day. This marks the lowest closing level since April 13 (56,502.8). The point drop is the third-largest on record, following the 'Reiwa Black Monday' on August 5, 2024, when it fell by 4,451 points. The index has now dropped 7,224.70 points (11.17%) over five consecutive days.
Compared to its all-time high of 72,366 recorded on June 25, the index is down 20.6%. At one point during trading, it fell by over 4,300 points, dipping below 56,000. The TOPIX index also fell by 232.40 points (5.90%) to close at 3,707.99, with 98% of the stocks listed on the Tokyo Stock Exchange's prime market declining.
The immediate cause of the decline was a simultaneous drop in U.S. tech stocks the previous day. On November 5, the Nasdaq Composite Index fell by 5.5%, reaching its lowest level in about six months, while the Philadelphia Semiconductor Index (SOX) plummeted by 12.24%. This marked the largest drop since the early days of the COVID-19 crisis in March 2020. AMD and Micron Technology each saw declines of 17%, while Nvidia dropped by 9%. The sell-off extended beyond Japan, affecting Asian markets like South Korea and Taiwan, where semiconductor stocks are heavily weighted.
The Nikkei attributed the sell-off in AI-related stocks to fears of increased regulation on data centers following the U.S. midterm elections. The Democratic Party, seen as more proactive on AI regulation, won gubernatorial races in states like Texas and Ohio, where numerous data center constructions are planned. As opposition to the energy and water consumption of data centers grows, there are concerns that new construction restrictions or temporary halts could be implemented. A slowdown in AI infrastructure investment could negatively impact Japanese companies supplying semiconductor equipment and materials.
Uncertainty surrounding the IPOs of AI companies has also weighed on investor sentiment. According to Reuters, there are doubts among investors about whether Anthropic, an AI company expected to go public later this month, will hold its investor presentation next week. The Nikkei reported that this news raised concerns about a potential delay in the IPO, further dampening investor confidence.
In the Tokyo market, stocks previously seen as beneficiaries of increased AI investment faced heavy selling. SoftBank Group fell by 10.83%, reaching its lowest point in over a year. Kioxia Holdings and Ibiden also dropped by 8.72% and 8.61%, respectively, with Ibiden hitting its daily limit for two consecutive days. Fujikura, which produces optical fibers for data centers, saw its stock plunge nearly 20% during trading, erasing all gains made since the beginning of the year. Major index contributors Advantest and Tokyo Electron both fell by over 10% at one point before closing down 4.99% and 5.60%, respectively.
Tomochika Kitaoka, chief equity strategist at Nomura Securities, noted that "investors are fleeing from specific stocks all at once." The significant losses for investors in margin trading have led to a broader sell-off in semiconductor-related stocks amid fears of further declines.
The buying momentum that had shifted to automotive and retail stocks the previous day did not continue. On the prior day, these sectors had shown strength due to expectations of tariff reductions and falling oil prices, leading to speculation about a shift in market leadership. However, on this day, Toyota, which had surged 16.68% the day before, fell by 5.52%, while Fast Retailing, the parent company of Uniqlo, which had risen 4.72%, dropped by 3.79%, indicating a sell-off in non-AI stocks as well.
The TOPIX index recorded a similar decline of 5.90%. Among the 225 stocks in the Nikkei average, only three, including Daikin Industries, which raised its earnings outlook, managed to gain. The trend of selling semiconductor stocks and buying other sectors has shifted to a broader sell-off across all sectors.
The sharp decline in stock prices has also affected market expectations for further interest rate hikes by the Bank of Japan (BOJ). In the overnight index swap (OIS) market, which reflects interest rate expectations, the probability of a rate hike in December dropped to as low as 52% during the morning.
Shunsuke Kobayashi, chief economist at Mizuho Securities, explained that the decline in stock prices makes it difficult for companies to raise funds through new share issuances and dampens household consumption, creating effects similar to financial tightening. He stated, "If stock market instability continues and expectations for interest rate hikes in the financial market diminish further, it will become challenging for the Bank of Japan to proceed with rate hikes."
However, some analysts argue that the stock price decline is excessive when viewed against corporate earnings. Recent quarterly results from major Japanese companies have shown several positive outcomes. Kazuaki Shimada, chief strategist at Iwai Cosmo Securities, remarked that the decline reflects an overreaction to the worst-case scenario of all data center construction plans being frozen.
* This article has been translated by AI.
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