Nikkei hits three-month peak as AI shares surge on Fed rate outlook shift

The Nikkei's gains outstripping the Topix highlights a constrained, technology-oriented advance that is heavily influenced by international AI enthusiasm and US interest-rate expectations, rather than a widespread reassessment of Japanese stocks. While a less aggressive Fed is positive for risk appetite, the impact on Japan is two-sided. If the Bank of Japan raises rates while the Fed holds steady, a stronger yen would hurt exporters and may limit further upside. The upcoming release of Fed meeting minutes will be a key test; a hawkish stance could undo the relief rally seen on Friday. With oil prices remaining high and service-sector inflation accelerating quickly, the conditions for a BOJ move are still present, creating a challenge for yen-sensitive market segments.

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Earlier:

• BOJ's Uchida says AI is a big demand shock lifting prices, warns of correction risk

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Following weak US employment data, Japanese AI stocks have regained appeal, although the limited scope of the rally indicates that investors are being more cautious in their choices than earlier this year.

Summary:

• By midday, the Nikkei had climbed approximately 2.5%, reaching a level not seen since early July, with AI-related equities driving the advance.
• The Topix index rose roughly 1.2%, indicating a rally focused on technology stocks.
• US markets ended higher on Friday as disappointing jobs figures lowered the likelihood of a Fed rate increase this month.
• A market observer noted that overall sentiment is still less enthusiastic than earlier this year and predicted a more discerning AI rally going forward.

Japan's Nikkei index advanced to a three-month high on Monday, with artificial intelligence-related shares leading the way after Wall Street posted gains at the close of last week.

The Nikkei was up about 2.5% at the midday break, touching its strongest point since the start of July. The broader Topix added approximately 1.2%, and the disparity between the two benchmarks indicates a rise concentrated in major technology stocks rather than a market-wide upturn.

The catalyst came from the United States, where equities moved higher on Friday after employment data came in softer than anticipated, lowering expectations for a Federal Reserve interest-rate hike at its meeting this month.

According to one market participant, investors have been buying AI stocks, but warned that sentiment is still less vibrant than earlier this year, when the Nikkei achieved a record high. The same source stated that the AI rally is expected to persist, although investors are likely to become more discriminating.

The development occurs on a significant day for Japan's monetary policy landscape. Separate survey data indicated that services growth slowed in September as price pressures remained strong, while Bank of Japan Deputy Governor Uchida described AI as a major positive demand shock. Market attention now turns to the Fed minutes due this week for additional clues.

Bank of Japan Governor Ueda