The Tokyo stock market saw wild, volatile swings this week, centered on artificial intelligence (AI) and semiconductor-related stocks. While the Nikkei 225 edged up ¥383 for the week, nervous trading with large intraday swings persisted. Whether a “sector rotation”—shifting funds from overheated AI and semiconductor names into laggard stocks—gains full-fledged momentum is likely to be the biggest focus for next week and beyond.
The Tokyo market opened the week with AI and semiconductor stocks under selling pressure, following the lead of a weaker U.S. market. However, inflows into defensive and laggard names provided support. Later, tailwinds emerged from expectations for Middle East peace following U.S. President Trump’s announcement of a meeting plan with Iran, as well as reports of a large-scale AI investment plan in South Korea, leading to buybacks in tech stocks toward midweek.
The mood shifted dramatically on July 2. A report that U.S.-based Meta is considering a business plan to offer its AI computing resources externally as a cloud service suddenly intensified caution over “excessive AI investment” in the market. Following a sharp drop in the Philadelphia Semiconductor Index (SOX), the Nikkei 225 plunged ¥1,741 on the day.
The ripple effect spread to South Korea’s market, where top-cap stocks Samsung Electronics and SK Hynix recorded a 9–14% crash the previous day. However, on July 3, both stocks staged a sharp rebound of around 10%, sending the KOSPI surging 5.76%. The KOSPI’s intraday trading range reached 758 points, the second-largest on record, vividly illustrating the market turmoil. Large-scale dip-buying by institutional investors underpinned the market, with net institutional buying in Samsung Electronics and SK Hynix alone reaching approximately ₩3.8 trillion (approximately $2.5 billion).
Lee Kyung-min, an analyst at Daishin Securities, noted, “In the Japanese market as well, Kioxia Holdings (285A.T) turned higher after a sharp drop, supporting investment sentiment in the semiconductor sector.”
Meanwhile, The Wall Street Journal reported that renowned investor Michael Burry—the model for the movie The Big Short—cited South Korea’s large-scale projects, calling it “the beginning of the end,” amplifying market anxiety. Concerns simmer about a repeat of the oversupply and earnings deterioration caused by past semiconductor overinvestment.
That said, the prevailing view among experts is that this correction is more of a valuation adjustment driven by “noise” rather than a deterioration in real demand (fundamental damage).
Huh Jae-hwan, an analyst at Eugene Investment & Securities, emphasized that “past semiconductor downturns were triggered by supply expansion, but the current situation is different.” He noted that data center investment by the world’s top five major IT companies is set to reach $848 billion (approximately ¥130 quadrillion) this year, with semiconductor demand expanding fivefold compared to three years ago, while supply has increased by only 40–50%. TSMC’s capital expenditure is only 50% higher than in 2022, and Samsung Electronics and SK Hynix’s combined investment this year is capped at ₩70–80 trillion (approximately ¥7.5–8.5 trillion), a 30–40% increase compared to 2022–2023. “Ultimately, it is demand that ends a big cycle,” the analyst said, arguing that as long as AI spending by general corporations continues to expand, it is too early to worry about a bubble bursting.
Han Ji-young, an analyst at Kiwoom Securities, focused on the fact that the U.S. June employment report came in below market expectations, pushing back expectations for a Federal Reserve rate hike in September. “The burden from WTI crude oil prices is also easing, and even if semiconductor and AI-related stocks underperform in the short term, further downward pressure on the overall index is likely limited,” she said.
In the Tokyo market next week, the breadth of this sector rotation will remain in focus. Recently, AI infrastructure-related stocks such as the three major wire and cable companies, JX Advanced Metals (5016.T), and Advantest (6857.T) have ranked among the top decliners, while toward the weekend, Kioxia, Kokusai Electric (6525.T), and Sumco (3436.T) staged sharp rebounds to lead gains, continuing a non-directional pattern.
A key event to watch is South Korea’s Samsung Electronics’ preliminary second-quarter earnings on July 7. Depending on the results, the direction for AI-related stocks in Japan and the U.S. could be significantly swayed. Additionally, Yaskawa Electric (6506.T) is set to report earnings on July 10. The full-year market consensus significantly exceeds the company’s plan, and if an upward revision is realized in the first-quarter results, it could not only serve as a catalyst for the stock but also stimulate physical AI-related stocks broadly.
On the domestic macro front, the rise in Japan’s 10-year government bond yield, which briefly topped 2.8% to its highest level since May 1997, could weigh on the stock market, particularly high-tech stocks. Caution over the Koizumi administration’s expansionary fiscal policies and delays in Bank of Japan rate hikes are pushing yields higher, with the psychologically important 3% level coming into view.
In terms of supply and demand, selling pressure related to ETF distribution payouts will be a major event. It is estimated that selling impacts of approximately ¥600 billion (approximately $3.7 billion) and ¥900 billion (approximately $5.6 billion) will occur toward the close on the record dates of July 8 and July 10, respectively, warranting caution over potential front-running selling pressure.
Elsewhere, the International Monetary Fund (IMF) will release its World Economic Outlook on July 8. As this is expected to influence European investors’ country allocation decisions, attention will focus on whether Japan’s growth forecast is revised.
Domestic corporate earnings season is also reaching its peak. In the retail sector, major players such as Seven & i Holdings (3382.T), Fast Retailing (9983.T), and Aeon (8267.T) will report in a concentrated period. Rebalancing funds are believed to have flowed into the retail sector this week, and depending on the earnings content, further revaluation buying could intensify.
Overseas, German industrial production and the U.S. trade balance are due on July 7, the U.S. FOMC minutes on July 8, and China’s producer and consumer price indices along with U.S. existing home sales on July 9. Regarding the Middle East situation, events related to the state funeral of Iran’s Ayatollah Khamenei are scheduled, making near-term progress unlikely. Meanwhile, expectations are growing for an August production target increase at the OPEC+ meeting, requiring attention to crude oil price trends.
While some market participants view a continued correction in AI and semiconductor stocks as necessary for the market’s medium- to long-term health, signs that U.S. hyperscaler (large-scale data center operator) stocks are bottoming out and reversing could provide support for AI infrastructure-related names. The coming week looks set to be one of watching the breadth of sector rotation while assessing individual corporate earnings results.