Japan’s Nikkei 225 Stock Average entered a technical correction as an artificial intelligence (AI)-driven rally in technology shares went into reverse, and concerns grew that the Bank of Japan (BOJ) may be poised to hike interest rates.

The Nikkei declined 3.3% on Thursday, the most since June 2021, taking its drop to about 10% from an all-time peak hit just two weeks ago. Renesas Electronics Corp led declines following disappointing earnings. The broader Topix slipped 3%, with exporters including Hitachi Ltd and Nissan Motor Co retreating. 

“There is no doubt that today’s (Thursday) sharp decline in the Nikkei has been driven by a fall in US stocks,” said Tomo Kinoshita, a global market strategist at Invesco Asset Management Japan. “But the increasing possibility of a rate hike in the BOJ’s July meeting brought sharp yen appreciation, which contributed to a fall in export-oriented stocks and shares that heavily rely on borrowing.”

Exporters were hammered as the yen extended gains that have seen it rally in the last two weeks, amid growing expectations the rate gap between Japan and the US is finally set to shrink. There is also the likelihood the BOJ will taper its bond buying programme in the policy meeting next week.

Volatile semiconductor shares were among the hardest hit, with Tokyo Electron Ltd losing as much as 6.2% after disappointing earnings from Tesla Inc and Alphabet Inc sparked concerns that their rally went too far. The Nikkei Volatility Index rose to as high as 22.57, a level last seen in April. 

“We are seeing overall corrections, and a risk-off trend grows as the Nikkei’s volatility climbs,” said Masahiro Yamaguchi, a senior market analyst at SMBC Trust Bank Ltd. 

The Nikkei 225 broke above its 1,989 peak earlier this year, amid optimism Japan may be finally getting out of decades of disinflation and confidence that firms are making an effort to boost shareholder returns.

“With Wall Street marking the worst day of the year, concerns over an imminent correction will inevitably dominate traders’ minds,” said Hebe Chen, an analyst at IG Markets Ltd.

  - Bloomberg