High Interest Rates and a Weak Yen: Why Did the Nikkei 225 Surge to 69,000 Yen?

In Thursday’s Tokyo stock market, the Nikkei 225 Stock Average rose significantly, gaining 2,203 yen from the previous day to reach 68,956 yen, nearly touching 69,000 yen just before the close of trading. The main drivers were stocks related to AI (artificial intelligence) and semiconductors. However, at the same time, the yen weakened to the 158 yen per dollar level, and long-term U.S. interest rates reached their highest level in about 19 years. Usually, ‘high interest rates’ and a ‘weak yen’ are considered burdens on stocks, but that was not the case on this day. In conclusion, it was a day where the tailwinds of a weak yen and global AI investment temporarily outweighed the headwind of high interest rates. The next litmus test will be the U.S. employment report due tonight.

First, let’s look at the details in Tokyo. Advantest, which manufactures semiconductor testing equipment, rose by over 9%, pushing the Nikkei 225 up by more than 700 yen on its own. Sectors related to capital investment and manufacturing, such as electric appliances, precision instruments, and non-ferrous metals, were bought. The background to this is the rise in the tech-heavy Nasdaq Composite Index in the U.S. the previous day and the fact that semiconductor giant Micron Technology’s earnings were better than market expectations. The sense of relief that global demand for AI remains strong was also transmitted to Tokyo. Trading value on the Tokyo Stock Exchange Prime Market also swelled to approximately 8.72 trillion yen.

I will supplement what happened in the U.S. the previous day. The ‘core PCE’ index—the indicator the Federal Reserve (the U.S. central bank) values most for judging prices, which excludes volatile food and energy prices from the money individuals spend on consumption—for August came in at a 3.0% increase year-on-year, below the market expectation of a 3.3% increase. Because the rise in prices was more moderate than expected, the view that ‘there might be another interest rate hike in October’ rapidly faded. In fact, the probability of an interest rate hike at the October Fed meeting has fallen by nearly half, from about 70% in late September to about 35% according to market estimates. With the perception that rate hikes are receding, buying returned to tech stocks in the U.S., and that flow became a tailwind for Tokyo.

From here, I want to talk about the exchange rate and interest rates, which is what I most want to convey today. Views on interest rates are split between Japan and the U.S. The ‘near-term rate hike expectations’ that affect short-term interest rates have retreated significantly, as we just saw. Yet, long-term interest rates—represented by the yield on the U.S. 10-year Treasury note, which is the rate at which the government borrows money for 10 years and serves as a benchmark for mortgage and corporate borrowing costs—are at about 5.30%, actually rising from 4.96% on September 22 and reaching their highest level in about 19 years since 2007. Even if near-term rate hikes are distant, long-term rates are not falling. Driving this ‘twist’ is anxiety that inflation might remain high for years to come, the risk premium for lending money for a long time, the increased burden on buyers as governments issue large amounts of sovereign debt, and the strengthening of crude oil prices due to tensions in the Middle East (Iran). What to remember here is the concept of ‘real interest rates.’ This is the effective borrowing cost, which is the nominal interest rate minus the inflation rate. If prices are rising by about 3% against a nominal 5.3%, the net real interest rate is around 2%, which is historically quite high. This high real interest rate is the true weight that affects interest-rate-sensitive assets.

Here, we can see a gap with conventional wisdom. According to textbooks, if long-term interest rates are at a 19-year high and there is a historic weak yen, growth stocks and tech stocks, which are bought at high prices in anticipation of large future profits, should face the strongest headwinds. However, in reality, in Tokyo, AI and semiconductor stocks, which should have been in the face of those headwinds, became the main players and pushed the index to a high range. Why? A weak yen is a tailwind for Japanese export companies and semiconductor manufacturers that earn money overseas, as their profits increase when converted to yen even if they sell the same products. Added to that is the demand story of global AI investment, which outweighed the headwind of interest rates. Furthermore, the standard rule that ‘if interest rates are high, buy banks and insurance companies because their margins will widen’ did not work on this day. Banks and insurance stocks actually fell, and funds flowed toward AI. The textbook logic did not hold up twice on the same day.

So, which sectors are likely to be affected by this market environment? The two tailwinds of a weak yen and AI are likely to favor semiconductors, precision instruments, electronics, and export companies that earn money overseas. On the other hand, growth stocks that rely on future profits and REITs are likely to face headwinds if long-term interest rates remain high. REITs are products that collect money from many investors to invest in real estate and distribute rent, etc., and because they hold buildings, etc., through borrowing, they tend to weaken when interest rates rise because the burden of interest payments increases. Regarding the exchange rate, the government and the Bank of Japan are keeping a check on excessive yen depreciation, and the market is aware that the upside of the yen’s weakness is likely to be heavy due to vigilance against ‘intervention’—a means by which monetary authorities directly suppress excessive price movements by selling dollars and buying yen in the foreign exchange market. While a weak yen is a tailwind for export companies and semiconductors, the tug-of-war continues as it is a headwind for households through the import costs of fuel and food.

I will also check the thermometer of the domestic economy. On the morning of October 1, the Bank of Japan (Japan’s central bank) released the September ‘Tankan’ survey, which asks companies across the country about their actual business conditions. The highlight of this survey is the ‘Business Conditions DI,’ which is the figure obtained by subtracting the percentage of companies that answered that business is ‘bad’ from the percentage of companies that answered that business is ‘good.’ The larger the positive number, the more bullish it is. Large manufacturing companies were at plus 24, which, although an improvement from the previous plus 22, fell slightly short of the expected plus 25. Large non-manufacturing companies were at plus 35, down slightly from the previous plus 37. Capital investment plans were at a solid level of plus 11.3% year-on-year. The content is that corporate business sentiment has not collapsed, but it is one step short of expectations. This firmness supports the view that the Bank of Japan, which raised its policy interest rate to 1.25% in September, can continue to raise interest rates gradually in the future, and is one of the reasons why Japan’s long-term interest rates are likely to remain high.

What to be careful about is that these readings are only a matter of probability. As in this case, it is common for the conventional wisdom that ‘high interest rates and a weak yen are a weight on stocks’ not to hold on the same day, and ‘fake-outs’ that do not move according to the pattern are inevitable. Causality that looks logical when looking back may actually only look that way after the fact. Moreover, the Nikkei 225 has reached a high level approaching 69,000 yen, so caution is needed as it is easy to swing in either direction—a pullback if good news is exhausted, or a further rise on new buying material. The Japanese version of the ‘fear thermometer,’ the Nikkei 225 VI—a scale that reflects how roughly the Nikkei 225 is likely to move in the next month or so from investor psychology, where a larger number indicates stronger vigilance—has fallen from the 27 range at the end of September to the low 20s, and nervousness has temporarily eased for the time being. However, it is safe to view this as a temporary pause while waiting for results.

The main event waiting for those results is the U.S. employment report due tonight. The employment report is the most highly watched economic indicator showing how much employment increased in the U.S. in the previous month, and it will be announced around 9:30 PM Japan time tonight. The market expects an increase of about 84,000 jobs. If the number is stronger than expected, long-term interest rates will rise further as ‘the economy and prices are still solid,’ and the pressure of a weak yen and high interest rates will likely increase, raising vigilance against intervention. Conversely, if it is weak, interest-rate-sensitive assets may feel relieved for a while—although I would like to keep in the back of my mind that long-term interest rates did not fall this week even with results like the ISM Manufacturing Index (a survey reflecting the U.S. manufacturing economy) and prices not being too strong. The hurdles will continue with the U.S. Consumer Price Index on October 14 and the Fed meeting on October 27-28.

In summary, Thursday in Tokyo was a day when the tailwinds of a weak yen and global AI investment outweighed the headwind of long-term interest rates at their highest level in about 19 years, leading to a sharp rise in the Nikkei 225 toward 69,000 yen. While short-term rate hike expectations halved from about 70% to about 35%, long-term interest rates remained high, and the net real interest rate remained high—as long as this composition continues, the environment will likely remain a tailwind for semiconductors and exports that benefit from a weak yen, and a headwind for growth stocks and REITs. While welcoming the fact that the ‘fear thermometer’ has temporarily fallen, it is a weekend to be prepared for both sides, suspecting it to be a temporary pause waiting for the results of tonight’s employment report, so as not to panic regardless of which way interest rates move.

―――――――――― Sources (all retrieved around 2026-10-02 06:00 JST) ・Nikkei 225 (10/1 close): OANDA Securities ‘Nikkei 225 Summary (1st)’ (Closing price 68,956 yen = +2,203 yen from previous day, futures 69,010 yen, 68,995 yen just before close, Prime trading value approx. 8.72 trillion yen, Advantest up over 9% pushing the index up over 700 yen, electronics/precision/non-ferrous rose, oil/banks/insurance fell) https://www.oanda.jp/lab-education/market_news/mn_1036848_202610011755/ Published: October 1, 2026 17:55 ・Nikkei 225 VI: Zaikei Shimbun ‘Nikkei VI: Rises, wary of high oil prices and rising interest rates’ (Currently around 22.92, warning factors = high oil prices/domestic and foreign interest rate hikes) https://www.zaikei.co.jp/article/20261001/871983.html / Reference investing.com‘Nikkei VI’ (9/29 = 27.74) https://jp.investing.com/news/forex-news/article-1694821 Published: October 1, 2026 / September 29, 2026 ・BOJ Tankan (September survey): Minkabu FX ‘Japanese Economic Indicators [BOJ Tankan]’ (Large manufacturing DI 24 <expected 25, previous 22>, outlook 21, large non-manufacturing 35 <previous 37>, capital investment plan +11.3%) https://fx.minkabu.jp/news/380419 Published: October 1, 2026 08:50 ・U.S. Stocks (9/30 final close) / U.S. 10-year bond / Core PCE: Nomura Securities ‘New York Stock Market Conditions’ (Dow 50,906.05 = -443.87 / -0.86%, S&P 500 7,651.54 = -0.25%, Nasdaq 26,861.07 = +0.24%, 10-year bond approx. 5.3%, August core PCE below expectations, IT +0.61% / Consumer Staples -1.68% / Healthcare -1.39%) https://advance.quote.nomura.co.jp/meigara/nomura2/users/asp/ny.asp Published: September 30, 2026 ・U.S. 10-year bond / Rate hike probability / Employment report forecast: Vantage ‘Why the S&P500 slipped as 10-year yields hit 5.30% (October 1, 2026)’ (10-year bond approx. 5.30% <9/22 was 4.96%>, August core PCE +3.0% <expected +3.3%> / headline +3.4%, October rate hike probability 34.9% <9/23 was 70.9%>, September employment report forecast +84,000 / around 21:30 Japan time) https://www.vantagemarkets.com/market-analysis/why-sp500-slipped-as-10-year-yields-hit-5-30-percent-october-1-2026/ Published: October 1, 2026 ・U.S. indicators / Dollar-yen (10/1): Zaikei Shimbun ‘October 1 NY Exchange Overview’ (Dollar-yen low 157.23 / high/close 158.25 yen, ISM Manufacturing 54.5 <expected 55.0>, Manufacturing PMI 55.9 <expected 57.0>, new jobless claims 197,000 <expected 200,000>, construction spending +0.9%, intervention vigilance -> high oil prices/dollar strength due to Middle East tensions) https://www.zaikei.co.jp/article/20261002/872043.html Published: October 2, 2026 ・Exchange rate (intervention vigilance / NY options): Minkabu FX ‘Today’s NY Option Expiry / Major Strike Prices and Scale’ (Dollar-yen around 158 yen, concentrated at strike prices 158.25/158.00/157.00, dollar strength progressing) https://fx.minkabu.jp/news/380504 Published: October 1, 2026 20:40 ・Economic Calendar: JETRO ‘World Political and Economic Calendar (October-December 2026) (North America)’ (10/2 U.S. September employment report, 10/14 U.S. CPI, 10/27-28 FOMC) https://www.jetro.go.jp/biznews/2026/09/890987f6c54dcc91.html Retrieved: October 2, 2026 ―――――――――― Disclaimer: This article is for informational and educational purposes and is not intended for the sale or purchase of specific financial products or investment advice. Numerical values are reference values obtained from each source and do not guarantee accuracy or completeness. Please make investment decisions at your own responsibility and after confirming the latest primary information.

#Macroeconomics #Nikkei225 #DollarYen #LongTermInterestRates #RealInterestRates