Japan's Nikkei drops 3% as Democratic gains in US midterms hit AI stocks

Tokyo witnessed a significant drop in Japan's Nikkei average on Wednesday as AI-related stocks experienced a decline, fueled by concerns that the Democratic party's gains in the US midterm elections might result in stricter regulations for AI infrastructure and reduced spending on AI development. The Nikkei closed at 61,127.9, marking a 3.1% decrease, while the broader Topix shed 1.85% to 3.857.97.

The political shift could reverberate across various sectors, including AI development, fiscal policy, defense spending, and regulation in healthcare, banking, and cryptocurrencies. According to Takamasa Ikeda, a senior portfolio manager at GCI Asset Management, the Democratic party's victory in several key states has sparked apprehension regarding potential stricter rules on AI infrastructure investments.

In Japan, chip-testing equipment maker Advantest and Tokyo Electron saw their shares plummet by 6.4% and 5%, respectively. Technology investor SoftBank Group experienced a decline of approximately 7%, as investors sold off AI-linked stocks. Memory chip manufacturer Kioxia also suffered a 10% drop. Companies involved in the production of fiber-optic cables, crucial materials for data centers, also took a hit, with Fujikura and Furukawa Electric declining by 8.2% and 9%, respectively.

Prediction markets indicated an increasing likelihood of a Democratic sweep in the US Congress, with over $1.48 billion wagered on the midterm elections. Out of the 225 components in the Nikkei, 130 experienced a decline, while 95 managed to rise.