Japan Equities

Japan's Nikkei 225 rose 3.3 percent to 68,956.72 on 1 October, led by technology and electronics, after memory results showed quarterly revenue of $54.23 billion against $11.32 billion a year earlier with an 87.0 percent gross margin and guidance of $61.5 billion. Customer financial commitments under long-term supply agreements had risen to $32 billion from $22 billion in June, and noncurrent customer contract liabilities reached $12.90 billion against $142 million. Chip-testing equipment maker Advantest rose 9.8 percent and Lasertec 11.1 percent in the session.

Why it matters here: Japan is the pick-and-shovel supplier to a memory capacity expansion rather than a participant in memory pricing, and that distinction is the whole mechanism here. The testing and inspection equipment needed to build high-bandwidth memory is concentrated in a small number of Japanese firms, so a guided revenue step from $54.23 billion to $61.5 billion requires capacity those firms sell, which is why the equipment-heavy quality and broad indexes moved multiples of the market and why the small-cap exposure participates through component and materials suppliers.

Counterpoint: The Nikkei gave back 0.94 percent to 68,309.46 in the following session, so the rally was not sustained, and a 3.3 percent single-day move in a national index on one foreign company's results is the signature of positioning rather than fundamental revaluation. Equipment orders are also the most cyclical link in the semiconductor chain and reverse hardest when a memory cycle turns, and an 87.0 percent gross margin invites the capacity additions that historically end such cycles.

The Bank of Japan's September Tankan survey, published 1 October, showed the business conditions diffusion index for large manufacturers rising to 24 from 22 in June, a sixth consecutive quarterly improvement and the highest in eight years, against a prior forecast of 17. Medium-sized manufacturers jumped 6 points to 23 and small manufacturers rose 5 points to 14, while all enterprises across all industries improved 3 points to 21. Large manufacturers revised fiscal 2026 current profit forecasts up 21.7 percent and all-industry fixed investment is forecast to rise 7.6 percent. The survey covered 9,104 enterprises with a 99.4 percent response rate.

Why it matters here: A 21.7 percent upward revision to annual profit forecasts is a direct, company-reported earnings upgrade across the largest listed cohort, and it beat the firms' own prior forecast of 17 by a wide margin, which is why the value exposure concentrated in large manufacturers is named first. Breadth is the strongest feature for this class rather than the headline: medium and small manufacturers improved more in points terms than large ones, so the upgrade reaches the broad and small-cap exposures rather than stopping at the megacaps, and rising fixed investment plans mean it is being reinvested rather than banked.

Counterpoint: Every forward-looking line in the same survey points down. Large manufacturers forecast 21 for December against 24 now, large non-manufacturers 30 against 35, and all industries 15 against 21, while large non-manufacturers had already slipped to 35 from 37. The change-in-interest-rate-on-loans diffusion index also jumped 7 points to 68 for all enterprises with a further rise to 71 forecast, meaning the funding cost of all this investment is climbing fast.

Japan's Nikkei 225 traded at 68,309.46 on 2 October, down 647.26 points or 0.94 percent, after rising 3.3 percent to 68,956.72 the previous day on a semiconductor rally driven by the memory results, with Lasertec up 11.1 percent and Advantest up 9.8 percent in that session. Pressure on global government bonds eased the same morning, with 10-year yields down around 3 basis points across major European economies and the U.S. 10-year at 5.243 percent, while front-month crude fell almost 3 percent.

Why it matters here: A 3.3 percent single-session index move on a foreign issuer's results is a positioning event, and positioning events retrace, so this is carried as a flows force on a days horizon rather than as a change in the fundamental case. Giving back under a third of the gain is an orderly consolidation, and it concentrates in the exposures that led the surge, the equipment-heavy quality index, with the small-cap exposure exposed because it had lagged the megacap technology move on the way up.

Counterpoint: The honest objection is that this force is almost too small to matter. A 0.94 percent pullback after a 3.3 percent advance leaves the market comfortably ahead, and the fundamental support behind the move is independent of the chip rally: the same week's Tankan showed large manufacturers' sentiment at an eight-year high with profit forecasts revised up 21.7 percent, so the retracement is price discovery rather than evidence reversing.

The Strait of Hormuz, which carried around 20 million barrels a day before the conflict, remains blocked, with tanker charter rates at record highs and fuel shipments from the region constrained. At least three tankers were attacked attempting transit during the week. Japan's September Tankan showed input price diffusion indexes well above output price readings for manufacturers of every size, at 59 for large manufacturers against an output price reading of 40.

Why it matters here: Geography makes this a Japan-specific vulnerability rather than a generic energy story, which is why it is carried on the geopolitics factor for this class: the Gulf-to-Japan route is long, it runs through the closed strait, and there is no domestic substitute. The business survey shows the cost already arriving faster than firms can pass it on, which is the margin channel that matters for equity earnings and why the value exposure, concentrated in utilities, shipping-exposed industrials and refining, is named alongside the broad market.

Counterpoint: Japan's market was the strongest in the region on 1 October, rising 3.3 percent, and the same survey showed large manufacturers' sentiment at an eight-year high with profit forecasts revised up 21.7 percent, which indicates the economy is absorbing the conflict rather than buckling under it. The currency-hedged and export-weighted parts of the market also benefit from the weaker yen that tends to accompany higher import costs.

Brent settled at $102.31 a barrel on 1 October, up 4.4 percent, after the report of a third U.S. carrier strike group heading to the Middle East. The Bank of Japan's September Tankan, released the same day, showed input price diffusion indexes of 59 for large manufacturers and 71 for small manufacturers, both far above output price readings of 40 and 41 respectively.

Why it matters here: The survey makes the squeeze legible rather than theoretical: firms are reporting input prices rising far faster than they can raise output prices, and oil is the input that moved. Large exporters have currency and pricing offsets, so for this class the damage concentrates in the domestically oriented and energy-intensive parts of the market, which is why the small-cap exposure with a small-manufacturer input price reading of 71 and the value exposure skewed to heavy industry and utilities carry it rather than the hedged exposures.

Counterpoint: Japanese equities were the strongest market in the region on the day, with the Nikkei 225 rising 3.3 percent to 68,956.72 on the semiconductor rally, and the same business survey showed large manufacturers' sentiment at an eight-year high while input price pressure for large manufacturers actually eased three points from June. The cost channel is real but was comprehensively outweighed on the day it arrived.