Nikkei 225 Plunges Over 800 Points as U.S. Semiconductor Rout and OpenAI Report Batter AI-Related Stocks

The Tokyo stock market opened with early buying on the morning of June 29, only to rapidly reverse course as the session progressed. The Nikkei 225 briefly saw its decline exceed 800 points, trading around the 68,600 level. While bargain-hunting by overseas speculative funds initially emerged following the historic 3,005-point plunge on Friday, June 26, the weight of the semiconductor stock rout in the U.S. market gradually tipped the balance in favor of sellers.

In U.S. markets on June 26, the Dow Jones Industrial Average fell for the first time in three sessions, closing down 44 points (0.08%) at 51,876. The decline was led by artificial intelligence-related and semiconductor stocks, as a report that OpenAI is considering postponing its initial public offering chilled market sentiment. Profit-taking concentrated on memory chip giant Micron Technology, which had surged on strong earnings, sending the Philadelphia Semiconductor Index (SOX), composed of major chip-related stocks, tumbling 5%. Tokyo markets carried this momentum directly into the new week, with AI and semiconductor names such as Advantest (6857.T), SoftBank Group (9984.T), and Kioxia all trading lower.

On the other hand, falling crude oil prices provided support for domestically oriented stocks. NYMEX crude oil futures briefly dipped to the mid-$68 per barrel range on June 26, a level not seen since February 27. This move reflected prices last observed before the U.S. and Israel launched attacks on Iran on February 28, easing concerns somewhat that elevated oil prices would dampen domestic consumption. Against this backdrop, select domestic demand stocks attracted buying, and the Tokyo Stock Price Index (TOPIX) rebounded. Individual names showed a clear divergence, with Tokyo Electron (8035.T) and Taiyo Yuden (6976.T) advancing.

Recapping Last Week's Seismic Market Swings

To understand this week's price action, one must revisit the historic volatility Japanese equities endured last week. According to market participants, the Nikkei 225 achieved an eight-session winning streak early in the week — its longest since August-September 2023 — driven by aggressive buying in AI and semiconductor-related stocks. The index briefly touched a high of 72,831, fueling expectations of a new all-time record. However, sentiment shifted dramatically as overheating concerns took hold. On June 23 and June 26, the index recorded its sixth-largest and third-largest single-day point declines in history, respectively, ultimately closing the week down 1,889.18 points (2.7%) at 69,360.88. The average daily trading range for the week reached 2,433 points, underscoring the extreme level of market volatility.

Multiple factors intertwined to drive these wild swings. First, AI and semiconductor stocks had become overheated. After leading the broader Japanese market higher since the start of the year, these names faced intensifying profit-taking pressure, particularly from short-term overseas traders. Second, a sharp sell-off in South Korean semiconductor stocks triggered a chain reaction. In particular, market speculation spread that SK Hynix would scale back production of high-bandwidth memory (HBM) and shift capacity toward commodity DRAM. This move was interpreted as potentially increasing costs and squeezing margins for hyperscale cloud service providers, raising doubts about the sustainability of the AI investment boom. Third, resurgent geopolitical risks surrounding the Strait of Hormuz pushed crude oil prices higher, reinforcing a risk-off posture across the market.

Even amid these sharp declines, strong earnings from Micron Technology temporarily sparked short-covering. The company's revenue and profit significantly exceeded market expectations, and its outlook for the June-August quarter also surpassed forecasts. This positive catalyst drove the Nikkei 225 to its fourth-largest single-day point gain in history on June 25, with some capital also flowing into lagging value stocks and domestic demand names. However, the tide turned again heading into the weekend, as declining share prices among U.S. hyperscalers and the aforementioned report of OpenAI's IPO delay dealt a fresh blow, sending AI and semiconductor stocks into another tailspin.

Market Views and Key Focus Ahead

Market participants are divided on how to assess the current correction. Some strategists note that "for investors who have been cautious about entering AI-related stocks, this pullback may present an attractive buying opportunity." Given the extremely high year-to-date gains, a degree of profit-taking is viewed by some as a healthy adjustment.

However, caution remains deeply entrenched. The biggest concern centers on asset rebalancing by overseas pension funds at the end of June. The market had previously anticipated profit-taking in AI-related stocks heading into the end of June. If the current decline falls within the scope of that expectation, it remains manageable. But the OpenAI IPO delay report has cast uncertainty over whether anticipated new buying of AI-related stocks by pension funds from July onward will proceed as scheduled. Market sources suggest that "buying on dips during a modest correction in AI-related stocks should be approached with a cautious stance."

Crude oil price trends also warrant continued attention. The decline in NYMEX crude oil futures to levels seen before the February attacks on Iran provides a tailwind for consumption-related stocks. However, geopolitical risks surrounding the Strait of Hormuz have not fully receded, and if crude oil prices resume their upward trajectory, they could once again be perceived as a drag on Japan's domestic economy.

The Nikkei 225 currently trades around the 68,600 level, substantially below the psychologically important 70,000 mark. With the month-end and quarter-end approaching this week, intermittent rebalancing trades by institutional investors are likely. Whether the sell-off in AI and semiconductor stocks runs its course or faces further selling pressure from new negative catalysts, Tokyo markets appear set for continued nervous trading.