The Truth Behind the 'Polarization' Occurring Amidst a 24-Year High US Interest Rate of 5.34% and the AI Bubble

The front lines of the October market, where explosive demand for AI and the highest US interest rates in 24 years are clashing

October 2, 2026, was a day of extreme tension for investors in the Tokyo stock market. The Nikkei Stock Average closed at 68,309.46 yen, down 647 yen from the previous day. The TOPIX also ended the day at 4,091.00 points, with selling pressure dominating the overall market. Looking back at the movements over the past few days, the market has seen intense volatility, with stock prices jumping by more than 2,000 yen in a single day only to plummet the next.

The trigger for this turbulent market was three key macro factors that occurred almost simultaneously in Japan and the US.

The first was the strong earnings report from a major US semiconductor memory manufacturer, released after the market closed on September 30, which exceeded market expectations. This spread the view that ‘the momentum of AI infrastructure investment is real,’ leading to an astonishing surge in the Nikkei Stock Average on October 1, which at one point jumped over 2,200 yen, nearing the 69,000 yen level.

However, the second factor, a sharp rise in US long-term interest rates (10-year Treasury yields), poured cold water on the celebratory mood.
In the US bond market on October 1, interest rates reached 5.34% at one point, marking the highest level in about 24 years. As a result of heightened caution regarding global rising interest rates, heavy selling pressure was applied to Japanese stocks as a whole on the following day, the 2nd.

Furthermore, as a domestic factor, the core Consumer Price Index (CPI, excluding fresh food) for the Ku-area of Tokyo for September, announced on the morning of October 2, rose 2.7% year-on-year, exceeding the market’s prior forecast of +2.4%.
The Bank of Japan’s Tankan survey (September survey) released on October 1 also showed mixed results, with the business sentiment index (DI) for large manufacturing companies improving to 24, while the non-manufacturing sector worsened to 35.

Looking at the trading trends by investor type for the fourth week of September (September 24–25) published by the Tokyo Stock Exchange, the main culprit behind this volatile market becomes clear.
While overseas investors were net sellers of cash stocks by 93 billion yen (for the third consecutive week), they were net buyers of futures by a significant 635.8 billion yen.
In contrast, domestic trust banks were net sellers of 367.3 billion yen, and individual cash stock investors were also net sellers of 8.6 billion yen.

In other words, the current Japanese stock market is not being bought steadily by investors with a long-term perspective. It can be said that a highly unstable supply-demand dynamic is at work because overseas short-term players are using futures to violently push prices up and down.

The endurance race of technology investment and the ‘invisible tide’ of entrenched domestic inflation

If taken individually, the series of news items might end as simple stories like ‘semiconductor stocks had a party’ or ‘the whole market fell because interest rates were high.’
However, if you broaden your perspective a little, you can see that they are moving within a single context: ‘persistent inflation risk and the endurance race of technology investment.’

Let’s dig deeper into the changes happening here from two angles.

① ‘Hyper-localization’ of AI demand and the polarization of performance

There is constant debate in the market about ‘when the AI bubble will burst.’
However, what became clear with this movement is that the benefits of AI investment are completely concentrated in a few infrastructure companies in servers and semiconductors.
Huge infrastructure investments by giant IT companies are still continuing, and there are no signs that related investments will suddenly drop to zero.

However, it is important to note that this is only a fact for a part of the infrastructure supply side. For other general manufacturing and service industries that are trying to streamline their businesses using AI, only the cost burden from high interest rates and high material prices is currently taking precedence.
As a result, the polarization of performance is rapidly progressing between some growth stocks bought on expectations and the vast majority of other companies struggling with real costs.

For investors who have just started touching individual stocks, this is a phase where it is easy to face the strange phenomenon of ‘the Nikkei average is rising, but the stocks I own are not rising at all.’
That is nothing more than a handful of stocks with high index contribution being driven up by futures-led trading.

② Changes in consumer mindset and the ‘cautious government and Bank of Japan’

Another major trend is the change in the nature of domestic inflation.
The fact that the Tokyo Ku-area CPI rose to +2.7% indicates that Japan’s price increases are not a temporary event but are becoming structurally entrenched.
The worsening business sentiment in the non-manufacturing sector in the BOJ Tankan is likely a realistic reflection of rising labor costs due to severe labor shortages and the cautious domestic demand and consumer sentiment accompanying inflation.

Until now, ‘yen depreciation and high prices’ were sometimes welcomed as positive factors for Japanese stocks, as they boosted the performance of export companies.
However, the market’s mindset is clearly changing.
Because the risk of the Bank of Japan taking additional interest rate hikes due to sticky prices has become a reality, it seems that the psychology of fearing ‘the cooling of the domestic economy due to rising interest rates’ is becoming stronger than the benefits of a weak yen.

The light and shadow of sectors hit by macro factors and the calm separation of time horizons

These structural changes in the macroeconomy bring completely different effects depending on the industry (sector). Let’s organize the situation each player is in from the perspective of business structure, one side at a time.

Financial sectors such as banks and insurance

The global rise in long-term interest rates and expectations of domestic rate hikes are creating an environment that tends to have a positive impact on business performance in the form of improved investment yields.
Because these business models have suffered through long periods of low interest rates, the transition to a world with interest rates acts directly as a factor that boosts net income.

Interest-rate-sensitive sectors such as real estate and automobiles

Since rising interest rates lead directly to higher mortgage and auto loan rates, they act as a negative factor that directly dampens consumer purchasing desire. Furthermore, because the companies’ own funding costs also increase, this is a clear headwind for business structures that have expanded on the premise of low interest rates.

Technology sectors such as precision instruments and electrical equipment

Demand for advanced components and semiconductors, particularly for cloud data centers, remains extremely robust against the backdrop of global investment competition.
Strong demand, enough to repel macroeconomic slowdown risks, has become a powerful driving force for sales growth for specific infrastructure companies.

Energy-intensive sectors such as materials and electric power

A rapid increase in data centers means that a vast amount of electricity will be consumed. This not only leads to soaring infrastructure costs, but for industries like materials that cannot fully pass on rising raw material costs to final prices, it becomes a factor that puts pressure on business performance in the form of significant increases in manufacturing costs.

Sectors with strong price-pass-through capabilities such as infrastructure and resources

Even in an inflationary environment where the domestic CPI reaches +2.7%, industries that handle essential services and resources have the strength to easily maintain unit sales prices by revising the prices of their goods and services.

Life-essential and domestic demand sectors such as retail and services

In an inflationary phase where individual wage growth does not keep up with rising prices, consumers’ real purchasing power diminishes.
Demand for domestic services other than daily necessities becomes visibly prone to cooling, increasing the risk of a double punch of declining customer numbers and rising costs.

[Categorizing the ‘Time Axis’ of Continuing Impacts]

To avoid clouding investment decisions, it is necessary to categorize and consider how long these impacts will last along a time axis.

• Short-term (temporary shock): Stock price fluctuations of several hundred to 2,000 yen per day that occur every time US and Japanese economic indicators are announced. This is temporary noise caused by the short-term futures trading by overseas investors mentioned earlier, and is a nature that should be viewed separately from corporate fundamentals.

• Medium to long-term (trends lasting several months): The issue of how long US long-term interest rates will remain at a historically high level in the 5% range. If this high interest rate level continues for several months or more, the previous ‘market dominated by growth stocks bought solely on expectations’ will reach its limit, and a long-lasting trend is likely to form where market funds gradually shift toward re-evaluating ‘undervalued stocks (value stocks)’ that are backed by actual business performance and asset value.

Important catalysts ahead in October and risk management to ride out volatility

From now until the end of the year, there is a series of important events that will determine the direction of the market. It is necessary to be prepared for the moment the market tide changes while keeping in mind the dates in the schedule shown below.

• October 5, 2026 (Mon): Japan – Extraordinary Diet session convened (start of discussions on fiscal policy and inflation countermeasures)

• October 6, 2026 (Tue) 15:00: Bank of Japan Governor Kazuo Ueda and Finance Minister Katayama speaking opportunities (focus on mentions of interest rate hike stance following upward price revisions)

• October 14, 2026 (Wed) 21:30: US – Consumer Price Index (CPI) announcement (the most important indicator that will determine the direction of US inflation and interest rates)

• Late October 2026 onwards: The start of the full-scale earnings announcement season for major Japanese and US companies (the timing when concrete returns on AI investments and the progress of rising costs will be directly disclosed)

With such important events ahead, when facing a ‘high-volatility market’ where daily price movements are intense—as is the case with Japanese stocks currently—what beginner to intermediate investors must thoroughly implement is not specific trading techniques, but rather organizing their knowledge of thorough risk management.

Specifically, this includes controlling the ‘position size’ (investment amount) that you expose to risk at any one time to be smaller than usual. This is because if the range of stock price fluctuations doubles, the speed at which you incur losses also doubles.
Furthermore, deciding on a clear criterion for ‘at what price to cut losses (exit)’ before purchasing, and being prepared to execute it, is the ironclad rule for protecting your assets from the risk of a significant loss of principal.

Afterword

If you follow daily news in isolation, you tend to get swayed by sudden market changes and your thinking becomes paralyzed.
However, when you piece together elements like high US interest rates, domestic inflation, and localized AI demand like a puzzle, the real intentions of investors—why certain sectors are being bought and why the overall market is heavy—should have become visible.

This situation will be further rewritten by the next US CPI figures to be announced and the corporate earnings announcements starting in late October.
Rather than deciding to buy or sell based solely on news headlines, you should always keep your eyes on the changes in the business structures behind them.

Disclaimer:
This article is intended for the purpose of providing general information regarding macroeconomics and sector trends, as well as organizing investment knowledge, and does not recommend or solicit the buying or selling of specific securities or financial products. Furthermore, it does not guarantee the accuracy of the information provided or future results. Please make actual investment decisions and trading determinations at your own responsibility and judgment.