Japan Drives Asia's Stock Decline as AI Selloff Continues

Japanese equities led losses in the Asian markets following a sharp downturn on Wall Street, as skepticism surrounding the artificial intelligence boom extended into a second day.

Major technology firms bore the brunt of the selloff, with Advantest Corp. tumbling as much as 11% in Tokyo and SoftBank Group Corp. dropping 6%. This came after both the S&P 500 and Nasdaq 100 plunged on Monday, fueled by concerns over valuations following the release of a low-cost AI model by Chinese startup DeepSeek. With many Asian markets, including China and South Korea, closed on Tuesday for the Lunar New Year celebrations, trading activity was subdued.

Meanwhile, the U.S. dollar gained against all Group-of-10 currencies after President Donald Trump announced plans to impose tariffs on foreign-made semiconductors, pharmaceuticals, and select metals to encourage domestic manufacturing. Scott Bessent, who reportedly advocated for gradual universal tariffs, was confirmed as the next Treasury Secretary, according to the Financial Times.

“It’s premature to assess the long-term impact of DeepSeek, but what’s evident is the crowded positioning within sectors that could be affected,” said Matthew Haupt, a portfolio manager at Wilson Asset Management. “The growth outlook is no longer a certainty, and shifting probabilities alone are enough to trigger a selloff.”

Monday’s downturn in AI stocks disrupted the market narrative that had prevailed since Trump’s re-election in November, which had been driven by optimism surrounding deregulation, tax cuts, and government-backed AI investments.

Early Tuesday, U.S. equity futures showed little movement following Monday’s sharp losses. In Asia, Treasuries slipped slightly, with the 10-year yield rising one basis point to 4.55%, after a nine-basis-point drop the previous day. The Bloomberg Dollar Spot Index climbed 0.3%, continuing its upward trend from Monday.

Several Asian markets, including Taiwan and Vietnam, remained closed for Lunar New Year, while exchanges in Hong Kong and Singapore planned to close early.

In the U.S., Nvidia Corp., a leading name in the AI sector, plunged 17% in New York, erasing $589 billion in market capitalization—the largest single-day loss ever for a single stock. Despite recent efforts to curb their dominance, Nvidia, along with Apple Inc., Microsoft Corp., Amazon.com Inc., Meta Platforms Inc., and Alphabet Inc., still represent about 40% of the Nasdaq 100 and roughly 30% of the S&P 500.

Lunar New Year and Market Sentiment

As Chinese investors enter their Lunar New Year holiday, they face economic uncertainties. Recent data indicated an unexpected slowdown in activity at the start of the year, disrupting the momentum created by Beijing’s stimulus efforts and reinforcing the need for additional measures to sustain growth.

Global investors will closely watch earnings reports from major tech firms, including Microsoft and Apple, this week, in hopes of restoring confidence in the so-called "Magnificent Seven" stocks.

This earnings season is crucial, as Big Tech stocks hover near record highs while their valuations remain stretched. A key difference this time is that profit growth for the sector is expected to be at its slowest pace in nearly two years.

Founded in 2023 by Liang Wenfeng, head of AI-driven quantitative hedge fund High-Flyer, DeepSeek develops open-source AI models that allow the broader developer community to inspect and enhance the software. The startup’s mobile app quickly gained traction, reaching the top of the iPhone download charts in the U.S. following its January release.

Unlike other chatbots such as OpenAI’s ChatGPT, DeepSeek’s AI distinguishes itself by explicitly detailing its reasoning before responding to prompts. The company claims its R1 model rivals OpenAI’s latest offering and has granted licenses to individuals interested in building chatbot applications using its technology.