Global AI Trade Unwind: Nikkei 225 Approaches Technical Bear Market as Japanese Bonds Rise with US Treasuries

The sell-off triggered by the unwinding of AI-related trades is spreading from Wall Street to Asian markets.

The Nikkei 225 Index is nearing a technical bear market as investors exit AI-related positions, while Japanese government bonds advanced on Friday, tracking gains in US Treasuries, as global risk aversion intensified further.

The Nikkei 225 Index has fallen significantly since late June and faces the risk of entering a technical bear market, defined as a 20% decline from its peak.

The performance gap between the technology-heavy Nikkei 225 Index and the broader TOPIX Index has widened to the largest in decades, underscoring the impact on Japanese equities from the concentrated unwinding of AI-related trades.

On Wall Street, the decline in chip stocks accelerated and spread after the election, with investors selling technology shares on speculation that the Democratic Party will crack down on the AI industry.

The Nasdaq 100 Index fell 6.4% on Thursday, its worst single-day performance since March 2020, wiping out $2.3 trillion in market value; a key gauge of chip giant performance dropped 12%.

As the US equity sell-off spread to Asian markets and global risk aversion deepened further, capital shifted from risk assets to government bonds.

US Treasuries surged on Thursday, and Japanese government bonds rose on Friday in tandem, with the benchmark 10-year Japanese government bond yield falling 7 basis points to 2.685%.

The rally in Japanese bonds comes as demand for Japanese debt has shown signs of improvement after yields rose to multi-decade highs this year.

With yields rising, demand from domestic investors and foreign buyers recovering, and the market environment continuously improving, global fund managers have become more positive on long-term Japanese government bonds.