Japan, a very uneven rebound…

Since 7 April and the announcement of the truce in the Middle East conflict, a sharp rebound in risky assets has been observed. This move has mainly benefited Asian equity markets, which may seem counterintuitive given the high exposure of many Asian countries to the conflict, as they are heavily dependent on imports from the Gulf.

At first glance, performance at the end of April therefore appears to signal a return to the trend that prevailed before the conflict. However, significant disparities can be observed, particularly those linked to the very clear dominance of the tech/ AI theme. The recent performance of the Japanese market is certainly the clearest illustration of this.

The recent rebound in the Japanese equity market is in fact misleading, as it has been driven almost exclusively by renewed investor interest in the AI theme. As a result, we have observed divergent trajectories between the Nikkei index, which is more concentrated and more exposed to technology stocks, and the broader, more diversified Topix over the recent period, with one of the largest performance gaps of the past 25 years, reaching as much as 15 percentage points in favour of the former.

A more detailed analysis of Topix performance confirms this view. Between 7 April and 30 April, 21 of the 33 sectors making up the index posted negative performance. Another observation is that the “tech” sector was by far the largest contributor to performance, marking a stark difference from the previous upward phases of the past few months, during which the sources of performance were more diversified and balanced.

This does not, however, provide a faithful picture of the actual level of concentration, since within tech itself, the various sub-segments followed diametrically opposed paths. By the end of April, the “software and IT services” sub-sector of the MSCI Japan index had posted a sharp decline since the start of the year (-25.8%) and had extended its losses since 7 April. Equipment manufacturers and semiconductor makers, by contrast, recorded gains of +51.9% since the start of the year and a rebound of +26.4% since 7 April, respectively.

In the wake of this move, index concentration has mechanically increased. Within the Topix, the weight of the tech sector is back near its all-time highs and is close to 20%. Within the Nikkei, the stocks most inherently linked to the semiconductor cycle rank at the top: Advantest at 11.5%, Tokyo Electron at 7.5%, and SoftBank Group at 7.1%. While this remains far from extreme cases such as South Korea or Taiwan, it nonetheless must be acknowledged that the Japanese market has become more concentrated.

The recent rebound in the Japanese market is therefore not a resumption of the “Takaichi trade” that prevailed before the Middle East conflict, but rather part of a broader rebound in the AI cycle — more global geographically, but above all more targeted in sector and stock terms. Although the AI theme benefits from significant supportive factors, the strong concentration of performance is nevertheless a vulnerability for the Japanese market. All the more so because, outside of a scenario involving a lasting resolution to the conflict and the reopening of the Strait of Hormuz, it seems difficult to envision a catch-up move in the other sectors.

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