Japan's Nikkei 225 lost as much as 7% on Friday as fears that the AI investment boom could end abruptly combined with heavy overnight selling on Wall Street. Steep losses in AI-linked companies, including SoftBank and Kioxia, pushed the Nikkei below 60,000 points for the first time since May. The broader Topix fell 5.8%. Almost every stock declined during morning trading, which Tokyo traders described as "complete carnage".
Investors bought Japanese government bonds heavily as investors reduced exposure to risk. The yield on the 10-year government note declined by 8.5 basis points to 2.67%. Bond prices rise when yields fall.
Traders reported rumours that several hedge funds based in Asia had been wiped out during the preceding 48 hours of market turmoil. The traders pointed to Toyota shares gaining 17% on Thursday. Hopes that the swing against Donald Trump in the US midterms would lead to the removal of some tariffs drove Toyota's advance. Toyota recorded the largest single-day gain since 1987. Traders said the increase inflicted severe losses on hedge funds holding short positions in Japan's largest carmaker.
Analysts attributed the technology sell-off to fears that Democratic victories in key states would lead to stricter regulation of AI and data centres. The selling has developed into broader concern that the global market rally was overdue for a correction. Prashant Bhayani, chief investment officer for Asia at BNP Paribas Wealth Management, said technology losses were pushing many investors beyond risk budgets. Bhayani said the low-volatility environment that investors had become accustomed to had clearly ended. An international bank's Tokyo-based trading head said excessive concentration in investments was unwinding too quickly and argued that AI remained a crowded trade despite the selling. Japan's prime minister, Sanae Takaichi, said on Friday that the government was "watching developments carefully" during the decline.
Japan's equity market has attracted substantial global investment seeking exposure to the AI boom outside the United States. SoftBank shares fell nearly 11% on Friday amid a large volume of sell orders. SoftBank shares have lost roughly 60% from the peak reached earlier this year. SoftBank founder Masayoshi Son has been among Asia's strongest advocates for AI's future. Memory-chip producer Kioxia lost as much as 14% on Friday. Kioxia has served as an indicator of Japan's participation in the global AI investment theme. Kioxia shares have declined almost 78% from the June peak.
South Korea's Kospi Composite dropped 8.5%, falling below 5,000 points for the first time in nine months. Circuit breakers halted trading for 20 minutes shortly after the market opened. Samsung Electronics shares declined 9.9% amid concerns about potentially weaker memory-chip demand. SK Hynix shares fell 11.7% on the same concerns. Samsung Electronics and SK Hynix are the world's two largest memory-chip producers and together represent about half of the Kospi. The Kospi has lost about 46% from the June peak.
However, Albert Yong, managing partner at Seoul-based hedge fund Petra Capital Management, did not expect a substantial contraction in AI infrastructure spending despite the losses. Yong said hyperscalers could locate data centres in other US states or other countries. Yong said competition between the United States and China for AI leadership made hyperscalers unlikely to reduce AI infrastructure expansion significantly.