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Japanese equities experienced a continued downturn on August 21, 2025, marking the third straight session of losses. The Nikkei 225 index closed down 0.6% at 42,636, retreating from its recent record highs earlier in the week. Similarly, the broader Topix index fell 0.5% to 3,083. This pullback comes after a strong rally that pushed the Nikkei to an all-time high of 43,876.42 on August 19, reflecting investor caution amid profit-taking and external pressures.
The decline was influenced by a mix of domestic and international factors, including mirroring losses in U.S. technology stocks and heightened expectations for monetary policy tightening by the Bank of Japan (BOJ). Despite the overall drop, trading volume remained robust, with some investors viewing the dip as a buying opportunity. According to market analysts, the selloff was tempered by selective buying in undervalued sectors, preventing steeper losses.
Historical context shows that the Nikkei has been volatile in 2025, recovering from earlier lows driven by global economic uncertainties. Year-to-date, the index has gained approximately 15%, bolstered by a weaker yen and strong corporate earnings in export-oriented industries. However, recent sessions highlight a shift in sentiment, with the three-day loss totaling around 2.5%.
Technology sector leads the downturn
The technology sector was the primary driver of the decline, as Japanese tech shares tracked overnight losses on Wall Street. Investors have grown wary of high valuations in AI-related stocks, prompting a broader shift away from growth-oriented equities. Tokyo Electron, a key player in chip-making equipment, saw its shares drop 2.4%, extending losses amid concerns over slowing demand in the semiconductor industry.
SoftBank Group, a major technology conglomerate with significant investments in AI and startups, fell 2.05%, contributing to a three-day decline of over 12%. This follows a sharp plunge of up to 9.2% in SoftBank shares on August 20, influenced by broader Asian tech selloffs. Other chip-related firms like Advantest and Renesas Electronics also experienced drops, with Advantest down 6.3% in recent trading.
Naoki Fujiwara, senior fund manager at Shinkin Asset Management, noted that "investors continued to offload stocks to realize gains, but some who missed out on buying during the rally took advantage of the lower prices, which helped to limit the losses for the Nikkei." This selective buying underscores a market where profit-taking coexists with opportunistic entries.
Pharmaceutical giant Daiichi Sankyo was among the worst performers, plummeting 7.2% following discounted block trades that increased trading volume to over 300% of its three-month average. The drop highlights sector-specific pressures, including regulatory scrutiny and competitive dynamics in the biotech space.
Resilience in other sectors
While technology weighed heavily, not all sectors followed suit. Cable manufacturers, seen as proxies for data center demand, showed strength. Furukawa Electric climbed 1.17%, and Fujikura rose 1.02%, benefiting from ongoing investments in digital infrastructure globally.
Automakers also provided some support earlier in the week, with gains driven by a weaker yen enhancing export competitiveness. However, on August 21, the sector was mixed, reflecting broader market caution.
A recent survey indicated Japan's manufacturing PMI improved slightly to 49.9 in August, still in contraction but better than expected, signaling potential stabilization in industrial output.
Bank of Japan policy expectations
Market sentiment was further dampened by rising expectations of interest rate hikes from the Bank of Japan. A Reuters poll revealed that nearly two-thirds of economists anticipate a 25 basis point increase in the key rate before year-end, with October as the most likely timing.
The BOJ has maintained its short-term policy rate at 0.5% as of its July 31, 2025, meeting, but revised its core inflation forecast upward to 2.7% for fiscal year 2025, from a previous 2.2%. Governor Kazuo Ueda and board members have signaled readiness to normalize policy if inflation and growth targets are met. In a July summary, board members debated resuming hikes, noting inflation expectations nearing 2% and potential upward risks.
Economists project further hikes in 2025, potentially to 0.75%, driven by wage growth and economic resilience. The Japan Center for Economic Research survey showed 28 of 36 economists expecting an increase later in the year, amid positive firm views from branch reports.
This tightening stance contrasts with Japan's long history of ultra-loose policy, aimed at combating deflation. The shift could strengthen the yen, impacting exporters but aiding import-dependent sectors.
Global monetary policy influences
Japanese markets are closely tied to U.S. developments, with uncertainty around Federal Reserve policy adding pressure. Investors are monitoring Fed Chair Jerome Powell's speech at the Jackson Hole Economic Symposium, where signals on rate cuts could sway global sentiment.
Markets currently price in an 83% probability of a 25 basis point Fed rate cut in September 2025, following mixed inflation data. A recent poll showed 61% of economists predicting a cut to 4.00%-4.25% on September 17. Positive U.S. inflation reports in July boosted cut expectations, though some volatility remains.
The Nasdaq and S&P 500 fell overnight on August 20, with tech-heavy declines influencing Asia. Broader Asian markets were mixed, with Australia's ASX 200 rising over 1% to cross 9,000, while China's CSI 300 saw modest gains.
This interconnectedness highlights how U.S. policy easing could provide relief to Japanese equities, but delays might exacerbate current caution.
Market outlook and implications
Looking ahead, analysts suggest the Nikkei could stabilize if U.S. rate cuts materialize and BOJ hikes remain gradual. Foreign investment in Japanese stocks reached its highest weekly level in over four months last week, totaling 4.22 trillion yen in the quarter, indicating sustained interest.
However, risks persist, including geopolitical tensions, yen volatility, and potential slowdowns in global tech demand. Investors are advised to monitor upcoming data releases, such as Japan's trade figures and U.S. employment reports.
In summary, the recent pullback reflects a healthy correction after rapid gains, with opportunities in resilient sectors amid evolving monetary landscapes.
