Nikkei falls 0.5% to 62,400 as oil fears weigh on tech stocks

Key Facts

The Nikkei fell about 0.5% to around 62,400 points at the start of trading on Monday, with semiconductor and electronics stocks leading declines, according to InvestingLive. The pressure came as concerns over the conflict involving Iran and rising energy costs returned to the forefront of trading. Advantest fell 1.7% and Murata Manufacturing 1.0% during the session, reflecting a broader sell-off in chipmakers and electronic components companies. Moves in these stocks are significant given the link between demand for technology components and data centres and artificial intelligence. In the background, investors are awaiting the Bank of Japan's meeting this week and what it may reveal about the monetary policy path after September's rate hike.

Monday's losses were part of a broader decline in Japanese markets the previous week. On October 22, the Nikkei fell 2.7% amid a drop in Asian technology stocks and concerns over artificial intelligence investment and higher oil prices linked to the war with Iran, according to the Associated Press. Brent crude rose 4% to $113.17 a barrel that day, after touching a five-month high. Higher oil prices add to costs for Japanese companies and households, which rely on imported energy, and increase investors' sensitivity to the impact of input costs on profits. The market report attributed Monday's pressure to conflict risks and rising energy costs, saying that "higher oil prices increase costs for companies and households alike."

Inflation data highlight the challenge facing the central bank as it balances competing considerations. The core consumer price index, which excludes fresh food but includes fuel, rose 2.1% year on year in September, compared with an increase of 1.7% in August, matching the market average forecast, according to Reuters. The measure excluding fresh food and fuel rose 2.4% year on year after 1.9% in August. Reuters attributed the persistence of price pressures to fuel costs linked to the prolonged conflict in the Middle East, higher import prices due to the weak yen, as well as strong demand related to artificial intelligence. The Bank of Japan raised its key interest rate to 1.25% in September, its highest level in 31 years, making price data directly relevant to the timing of any subsequent move.

By contrast, the Bank of Japan's regional report depicts economic activity that has continued to improve. The bank said the economy had recovered moderately or improved in all nine regions, and that assessments for two regions had risen from the July report. The report also said global demand related to artificial intelligence was supporting production, with reports of increased output of electronic components, semiconductor manufacturing equipment, machine tools and telecommunications infrastructure products for data centres. This puts technology suppliers' stocks between two opposing forces: supportive production demand and concerns over oil and market volatility. According to InvestingLive, ING believes policymakers may prefer more time to monitor the economy before adjusting interest rates again.

ING expects the Bank of Japan to keep its interest rate at 1.25% at its October meeting, then raise it by 25 basis points in January and another 25 basis points in April 2027, bringing it to 1.75%. The forecast links a near-term hold to a later tightening path, as core inflation rose in September after slowing in August. But ING believes the fully priced-in hold may not be the main focus for investors. It said that "the yen and Japanese government bond yields are more likely to react to guidance than to the decision." The bank meets on October 29 and 30, with its statement and Outlook for Economic Activity and Prices report due on October 30.

Nikkei closing data show it fell from 64,916.7 points on October 19 to 62,693.16 points on October 23, before dropping about 0.5% at the start of trading on Monday. This places the latest session's losses within a weaker weekly trend, which coincided with pressure on technology stocks and concerns over energy prices. For investors in the Japanese market, near-term attention is focused on whether the bank will reaffirm its preference to wait, and on the signals it gives about the timing of the next hike. The oil price path also remains a direct factor in assessing import costs and potential pressure on companies and households. The Bank of Japan is scheduled to release its Outlook report alongside its statement on October 30.