Outlook for Japan's Equity Market: Long-Term Interest Rates and the Direction of AI-Related Stocks Remain Key Focus Areas

The Nikkei Average ended trading last week at ¥66,364.20, up ¥2,352.86 from its close on the 11th, as buying spread mainly across AI-related stocks. Although the postponement of a US listing by OpenAI and developments in the debate over AI development temporarily affected the market, the FOMC's rate hike and the weaker-yen, stronger-dollar trend provided support.

AI and semiconductor-related stocks came back into favor in the second half of the week, while concerns over regulations governing AI development eased following the US-China summit. Supply and demand ahead of the end-September ex-rights date also supported the market, and the Nikkei Average staged a sharp rebound.

Next week, the focus will be on dividend reinvestment demand in the early part of the week, with expectations that futures buying will emerge on the final cum-rights trading date. Long-term interest rates in Japan and the US continue to rise, with Japan's 10-year government bond yield at 3.115%, approaching a level not seen in around 30 years. In the US market, the PCE deflator and Micron's earnings are expected to be key market focus points.

In Japan, the release of the BOJ meeting minutes, the BOJ Tankan survey and the Tokyo metropolitan area CPI are scheduled, while market participants continue to assess the timing of an additional rate hike. In the US, the PCE deflator and employment-related indicators will be closely watched, and long-term interest rates are expected to remain a market concern.

From next week onward, attention should be paid to trends in long-term interest rates and AI-related stocks, as well as changes in supply and demand resulting from dividend reinvestment. While remaining alert to deterioration in supply and demand after the ex-rights date, market participants will need to monitor the possibility of an additional BOJ rate hike and the schedule for the release of US economic indicators.