Semiconductor and AI Concept Stocks Fuel Nikkei Index, Rising Over 22% This Year to Hit New Highs. How Long Can the Rally Last?

The concentrated surge in semiconductor and AI concept stocks was the primary driver of the Nikkei's massive rally. On May 7, the Nikkei 225 index skyrocketed by 3,320.72 points, setting a record for the largest single-day gain and touching 63,091.14 intraday. On that day, Ibiden surged 22.43%, SoftBank Group rose 18.44%, and Tokyo Electron gained 9%. Advanced Micro Devices ( AMD) earnings exceeded expectations, igniting the U.S. semiconductor sector, with global capital sentiment quickly spreading to the Japanese AI supply chain, serving as a key trigger for the day's surge.

The massive influx of foreign capital also constituted a significant driving force. As of the fourth week of April, overseas investors have net purchased 5.69 trillion yen in Japanese equities this year, far exceeding the total for the past two years. Goldman Sachs ( GS) strategist Bruce Kirk pointed out that North American capital has flowed back into Japanese equity assets, pushing the Nikkei index above the 60,000-point threshold. The continuous depreciation of the yen has further lowered the valuation costs of Japanese equity assets, attracting more risk-on capital inflows.

In addition, market expectations for a de-escalation in the Middle East also drove a concentrated release of risk appetite. Negotiations between the U.S. and Iran sent positive signals, with Trump stating at one point that the two sides were "highly likely" to reach an agreement; the surge in Japanese stocks was precisely the market's pricing reaction to the prospects of a ceasefire.

The Nikkei index is rallying fiercely, yet it remains significantly decoupled from Japan's weak economic fundamentals.

The Bank of Japan lowered its FY2026 GDP growth forecast from 1.0% to 0.5% on April 28, while raising its core CPI forecast from 1.9% to 2.8%; internal divisions regarding interest rate hikes have emerged, and the market anticipates another potential hike in June or July.

More importantly, the index's gains have been driven solely by a handful of heavyweight stocks like SoftBank, Advantest, and Tokyo Electron, while most stocks have lagged; on May 7, the Nikkei 225 surged 5.58%, while the broader Topix index rose only 3%.

A recovery in global risk appetite, the explosion of the AI supply chain, and the return of foreign capital have combined to push the Nikkei past the 60,000 mark; however, rebounding oil prices and rising inflation are now eroding corporate profits and consumer spending power, making it difficult for fundamentals to support the index at these highs as long as oil prices remain elevated.

The Nikkei index's rally has been primarily driven by a small number of tech stocks, while the majority of equities have not followed suit; this structural divergence suggests the foundation of the gains is not firm.

Although JPMorgan ( JPM ), Citigroup ( C) and other institutions still hold optimistic expectations, raising their year-end targets to 70,000 points on the basis of rapid AI development and yen depreciation, but this optimistic assumption is predicated on AI capital expenditures continuing to exceed expectations—a premise now facing the risk of corporate profits being eroded by oil prices.

Meanwhile, some analysts have pointed out that export-oriented companies such as automakers may find it difficult to benefit from the yen's weakness this fiscal year, with sector divergence intensifying and the index's overall direction becoming harder to determine.

A more influential variable comes from the reversal of carry trades. As the Bank of Japan raises interest rates and JGB yields climb, foreign capital could rapidly flow back into the Japanese stock market or quickly exit due to deleveraging, thereby exacerbating index volatility.

In addition, the margin buying balance of domestic funds remains at historical highs; rate hikes will increase leverage costs, and a concentrated liquidation of positions could amplify any market correction.

Overall, the Nikkei is at a sensitive stage with high valuations and pressured fundamentals. Any geopolitical shifts or inflation data exceeding expectations could trigger concentrated profit-taking. Short-term trends will depend on the progress of U.S.-Iran negotiations, the pace of the Bank of Japan's rate hikes, and changes in foreign investor sentiment.

This content was translated using AI and reviewed for clarity. It is for informational purposes only.