Market volatility driven by AI and semiconductor rotation
Japanese equities delivered mixed performance in July as investors rotated away from generative AI- and semiconductor-related stocks. Concerns over Chinese AI competition, elevated U.S. interest rates and questions surrounding the pace of AI-related investment weighed on sentiment. However, strong corporate earnings in Japan and the U.S. helped stabilise markets toward month-end, while gains in domestically oriented sectors supported the broader market.
Economic resilience and policy support remain intact
Japan’s economy continues to demonstrate resilience despite geopolitical uncertainty and elevated energy prices. Real wages have returned to positive territory, labour shortages are encouraging productivity-enhancing investment and inflation remains relatively contained. Whilst the Bank of Japan (BOJ) maintained its policy rate in July, markets remain focused on the future path of policy normalisation and exchange-rate developments. Recent coordinated intervention by Japanese and U.S. authorities has also helped reduce concerns over excessive yen weakness.
Investment-led growth supports constructive outlook
We maintain a constructive view on Japanese equities. The government’s recently approved growth strategy identified 17 strategic priority areas, providing a clearer framework for private-sector investment. Combined with ongoing corporate-governance reforms that encourage balance-sheet optimisation and improved capital efficiency, these initiatives are strengthening incentives for Japanese companies to invest and deploy cash more productively. We believe this investment-led dynamic has the potential to support sustainable earnings growth and represents an important but still underappreciated driver of the Japanese equity market.
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Written by Kazuhiko Hosaka, Senior Product Specialist, Asset Management One Co., Ltd