Japanese Stocks Slide on Tech Pullback as Iran Tensions Deepen

(Bloomberg) — Japanese stocks fell by the most since March as AI shares retreated from their highs amid rising expectations that the Federal Reserve will keep rates higher for longer following strong US jobs data.

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Heightening tensions in the Middle East further sapped risk appetite after Iran and Israel exchanged strikes. Oil prices climbed in response.

The tech-heavy Nikkei 225 Stock Average dropped 3.9% on Monday, its steepest decline since March 9. The broader Topix gauge slid 2.5%, with electric appliances the biggest drag.

“Investors started reducing positions in tech last week, then strong labor data further increased expectations for a Fed rate hike by the end of the year, and the conflicts in the Middle East just flared up again,” said Rajeev De Mello, global macro portfolio manager at Gama Asset Management SA. He expects “investor uncertainty” to continue through this week ahead of US inflation data.

Japanese AI-linked stocks like OpenAI investor SoftBank Group Corp., memory chipmaker Kioxia Holdings and server parts maker Murata Manufacturing Co dropped by more than 10% at one point. Chip gear makers Renesas Electronics Corp and Ibiden Co were also among the Nikkei’s worst performers.

Many AI-linked shares had reached record highs earlier this month, driven by enthusiasm around the AI infrastructure buildout. But the sector lost momentum after the Nasdaq 100 dropped about 5% and the Philadelphia Semiconductor Index slid 10% on Friday.

Concerns had already been mounting over lofty technology stock valuations and the sustainability of the AI-fueled rally. Japan’s Nikkei has outpaced the US and European indexes so far this year, with Kioxia’s stock price ballooning more than 580% in 2026, even taking into account Monday’s selloff.

Japanese semiconductor-related names look “ready for a sizeable correction” after their climb, said Andrew Jackson, head of Japan equity strategy at Ortus Advisors. The upcoming initial public offering of Elon Musk’s SpaceX is likely adding to the pressure, as investors exit positions in preparation for the mega listing, he said.

“The looming specter of the SpaceX IPO seems to be sucking the capital life force from the seemingly unstoppable AI/tech rally,” said Jackson.

Better-than-expected employment data from the US, released on Friday, is fueling expectations that the Fed may need to keep monetary policy restrictive for longer to contain inflation. Traders are also increasing bets on a Bank of Japan rate hike when policymakers meet next week, as officials grapple with mounting upside risks to inflation at home.

Defensive sectors like retail provided some support for the broader Topix, with names like eyewear chain Jins Holdings gaining after strong monthly sales in May. Insurance, food and some videogame stocks were also solid as investors rotated out of the AI sector.

ADVANCERS

DECLINERS

INSIGHTS

The MSCI AC Asia Pacific Index was down 3.3%

Topix Index is up 13% year-to-date, vs. MSCI AC Asia Pacific Index up 16%

Topix Index members are trading at 16.9 times their estimated earnings for the next 12 months

Japanese Stocks Slide on Tech Pullback as Iran Tensions Deepen

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