Tokyo Market Outlook: Momentum stocks roar back - can Nikkei sustain its run toward the 70,000 mark?

The Tokyo market officially entered Oct trading on Oct 1, with the Nikkei surging 2,203 points in a sharp straight gain. The advance of more than 2,000 points was the largest since Aug 5. The daily candlestick formed a large bullish bar, with Bollinger Bands expanding. The close approached the upper +3 sigma level, raising hopes for a breakout from the recent range-bound market. A two-session gain of 3,475 points could fairly be described as a surprising rally. The unwinding of positions built in anticipation of rising interest rates - specifically long financials / short AI semiconductor stocks - led to trend-following capital flowing into momentum names.

Micron Technology , a major U.S. memory chipmaker, reported earnings for its fiscal fourth quarter (Jun-Aug 2026) after market close on Sep 30. Results were outstanding across the board, and Micron's guidance for the Sep-Nov quarter exceeded market expectations. Although the stock saw mixed trading in after-hours trading, strong momentum in memory demand from AI data centers was once again brought into focus. Additionally, the release of the Bank of Japan's (BOJ) summary of opinions from its Sep monetary policy meeting dampened expectations for straight rate hikes, further channeling funds into momentum stocks centered on AI and semiconductor-related names.

At the Sep meeting, two Policy Board members who took office after the launch of the Takaichi administration voted against a rate hike. The summary of opinions released this time revealed that, even after U.S. Treasury Secretary Bessent openly expressed concern about yen weakness, a representative from the Cabinet Office called for a thorough examination of the impact of rate hikes. This was interpreted as the administration indirectly pressuring the BOJ to halt further tightening, contrary to U.S. wishes. With divergence between the BOJ and government becoming increasingly apparent, market voices suggested a rate hike at the Dec meeting is realistic. Regardless, easing fears over rapid monetary tightening had a positive effect on equities.

Historically, Oct has been known as a month when overseas investors tend to be net buyers of Japanese equities. The latter half of the month, when interim earnings for Mar fiscal-year companies begin in earnest, is also when foreign investors start focusing on the Halloween effect - the tendency for stocks held from autumn through the following spring to generate capital gains. Market attention is also likely to shift toward solid corporate earnings of domestic companies. Furthermore, the anomaly of a post-U.S. midterm election stock rally has gradually become a market topic, with market gaze increasingly tilting upward. As of Oct 1, the Nikkei's deviation from its 25-day moving average exceeded 5%, entering what is typically considered an overheated zone. However, in recent years, patterns in which uptrends continue without triggering textbook profit-taking pressure have recurred.

The question now is whether the Nikkei, propelled by overseas buying demand, can break above the 70,000 level and sustain its run toward the all-time high of 72,366.34 yen set on Jun 25. The key factor will likely remain interest rate levels. In the domestic bond market on Oct 1, the yield on newly issued 10-year Japanese government bonds (long-term rates) temporarily rose to 3.110%, even as expectations for straight BOJ rate hikes faded. Concerns are growing that government pressure to halt rate hikes could lead to yen depreciation and higher prices, causing the BOJ to fall behind the curve in policy response. As for the United States, while optimism spread that rising rates reflect a robust economy, persistently high rates could dampen financing appetite and restrain AI-related investment. Against a backdrop of high-volatility trading where momentum stocks swing sharply on interest rate moves, the U.S. Sep employment report is due on the evening of Oct 2, Japan time. Market participants will need to factor in potential profit-taking pressure on AI and semiconductor-related stocks that have moved higher, while considering upside risks to equities if expectations for additional U.S. rate hikes recede.

On Oct 2, the Sep Tokyo Consumer Price Index, Aug unemployment rate, Aug job-to-applicant ratio, and Sep monetary base are scheduled for domestic release before market open. After market close, FAST RETAILING CO., LTD. <9983> is set to release a flash report on Sep domestic UNIQLO sales trends. Overseas releases include the U.S. employment report, eurozone Sep Consumer Price Index, and U.S. Aug factory orders.

Source: MINKABU PRESS

*Translated by generative AI. Click here for the original article.