Changing Rate Dynamics and Japanese Equities

Japanese equities can absorb renewed rate pressure because US and Japanese rate rises affect the market through different channels.

• The Federal Reserve and the Bank of Japan left rates unchanged at the end of October 2026, while markets were already pricing further increases in December.
• Higher US yields are testing AI and growth stocks as data-center and semiconductor investment remains large, CoreWeave's debt burden has raised financing concerns, and Meta's results renewed debate over the funding and cash-flow potential of AI investment.
• Japanese equities have broader exposure across technology, financials, capital goods, trading companies, services and domestic demand, which gives the market resilience against a correction in US AI stocks.
• Japan's three decades of rising government debt have coincided with stronger corporate balance sheets and accumulated household assets; companies have reduced interest-bearing debt and many hold substantial net cash positions.
• Higher domestic rates may improve capital allocation by making funding costs and investment returns more relevant, while banks and insurers benefit from rising rates and property companies and expensive long-duration stocks face greater pressure.
• Nomura's house view expects the yen to weaken towards ¥165 per US dollar, while foreign investors account for roughly 60% of Japanese equity trading and rapid yen appreciation, as seen in August 2024, can trigger position unwinding.

Takeaway: Investors should assess how rate changes affect corporate decisions and valuation pricing in each Japanese sector, while monitoring the speed of yen movements and the funding discipline of US AI companies.