Democratic wins drag Nikkei 3% lower as AI stocks tumble

The decline reflects US political risk being priced straight into the AI supply chain, with Japanese makers of chip gear, memory chips and cables serving as proxies for American data centre spending. With the sell-off so narrowly focused, it looks like a deliberate rotation out of AI exposure rather than a wholesale exit from Japanese equities, and that could contain the wider fallout should the US cash session settle down. South Korea and Taiwan, two other markets with heavy AI weightings, are vulnerable to the same dynamic. If risk aversion spreads, a weaker Nikkei could also drag on the yen and Japanese government bonds. Whether the move continues depends on confirmation of the final congressional balance of power.

Tokyo’s AI favourites absorbed the blow from Washington’s changing political landscape, as investors reckon a Democratic Congress will complicate data centre spending.

Summary:

• By 0150 GMT, the Nikkei was 3.1% lower at around 61,130 and the Topix about 1.9% weaker near 3,860
• AI-linked shares set the pace of losses as concerns mounted over stricter US data centre rules
• SoftBank shed about 7%, Advantest 6.4%, Tokyo Electron 5% and Kioxia 10%
• Fibre-optic cable makers Fujikura and Furukawa Electric dropped 8.2% and 9%, respectively
• Breadth was mixed, with 130 Nikkei stocks falling and 95 rising
• Prediction markets indicated a possible Democratic sweep of Congress, though no chamber has been called

On Wednesday, Japan’s Nikkei share average tumbled more than 3% as AI-linked stocks crumbled, according to Reuters. The trigger was investor concern that Democratic gains in the US midterms will lead to tougher requirements for data centre projects and reduce the pace of AI infrastructure spending.

At 0150 GMT, the Nikkei was down 3.1% near 61,130, and the broader Topix had fallen roughly 1.9% to about 3,860. The Nikkei’s larger percentage drop is a function of its heavier exposure to the big technology and chip stocks that led the downturn.

Chip shares bore the brunt of the selling. Advantest, the chip-testing equipment maker, declined 6.4%, Tokyo Electron gave up 5%, and SoftBank Group, a technology investor, fell roughly 7%. Kioxia, which makes memory chips, tumbled 10%. The slide reached suppliers of the physical infrastructure behind data centres too: fibre-optic cable producers Fujikura and Furukawa Electric lost 8.2% and 9%, respectively.

A portfolio manager at a Tokyo-based asset manager told Reuters that Democratic victories in some key states had stoked concern about stricter regulation of AI infrastructure investment.

What selling did take place was targeted, not widespread. Of the 225 Nikkei constituents, 130 fell and 95 rose, a sign that investors were picking on AI-heavy stocks instead of dumping Japanese equities across the board.

Reuters reported that prediction markets increasingly expect a Democratic sweep of both chambers, with nearly $1.5bn riding on the elections. Neither chamber has been officially called. The result could matter beyond AI, potentially shaping the US fiscal outlook, defence spending and regulation of healthcare, banking and cryptocurrencies.

The slide highlights how dependent Japan’s market has become on the global AI trade, a source of much of the Nikkei’s recent strength. It also arrives after strong overnight earnings from US chip and server companies, underscoring that political risk is now vying with earnings as a force behind AI stocks.

For signals on whether the AI sell-off will deepen or let up, investors are watching the remaining US results and the response in US cash markets.