Japanese government bonds plunge on fiscal concerns; Nikkei falls 2.5% dragged down by AI-related sell-off

Source: Global Market Broadcast

Japanese government bonds fell sharply on Thursday as fiscal concerns resurfaced, while an overnight sell-off of Wall Street technology stocks dragged down AI-related heavyweight stocks, leading the Nikkei Index to drop.

The yen surged sharply against the dollar as traders remained vigilant for possible intervention by authorities to support the persistently weak currency.

The 10-year government bond yield rose 7 basis points to 2.77%, the highest level since mid-May, after a weak debt auction highlighted concerns over increased government spending.

The Japanese bond market has been under pressure since the government outlined a massive spending plan in its latest policy blueprint this week and called for the Bank of Japan to align monetary policy with growth efforts.

"The market's reaction to the blueprint sent shockwaves," said Katsutoshi Inadome, Senior Strategist at Sumitomo Mitsui Trust Asset Management.

Inadome said the removal of language about fiscal consolidation reignited concerns over borrowing in the market.

The Japanese government stated that by the 2040 fiscal year, total public and private investment will exceed 370 trillion yen (approximately $2.28 trillion), a move aimed at working with the private sector to support strategic industries.

Investors fear this could mean more borrowing, while the Bank of Japan may slow its pace of rate hikes as inflationary pressures intensify.

The benchmark Nikkei 225 Index fell 2.5% to close at 68,733.15 points, while the broader TOPIX Index edged up 0.09% after recent declines, as investors bought up undervalued stocks.

Among chip-related stocks, Advantest and Tokyo Electron fell 9.95% and 7.44%, respectively. Memory chip manufacturer Kioxia dropped 13.47%.

"The market is experiencing a natural correction with investors selling technology shares to lock in profits while buying undervalued stocks," said Kouji Toda, Senior Fund Manager at Resona Asset Management.

The Nikkei Index surged 37% last quarter, marking the largest quarterly gain since data began in 1965.

Of more than 1,500 stocks traded on the main board of the Tokyo Stock Exchange, 77% rose, 20% fell, and 1% were flat.

After dropping near a 40-year low, the yen suddenly jumped in late trading.