Nikkei falls 1.2% as Iran conflict, energy costs hit stocks

Japan's Nikkei 225 reversed an early rally to close lower as resurgent Iran tensions and surging energy costs triggered a selloff in technology and metals stocks.

The Nikkei 225 fell 1.2% on Wednesday, erasing gains that had briefly pushed the benchmark to a record high earlier in the session. The decline was driven by renewed concerns over the Iran conflict and rising energy costs, which weighed on technology and metals stocks.

"The market is pricing in a higher probability that the Iran situation deteriorates further, which directly impacts Japan through energy costs," said Masayuki Kubota, chief strategist at Rakuten Securities. "Tech stocks that had rallied sharply are seeing profit-taking as investors reassess the risk premium."

Technology and metals stocks led the declines, with semiconductor-related names among the biggest drags on the index. The selloff came as Brent crude rose 0.8% to $96.75 a barrel, extending gains as Middle East peace talks showed little progress despite President Donald Trump's assurances that Washington and Tehran were edging closer to an interim agreement.

The yen traded near 160 per dollar, a level that has kept currency markets on alert for potential intervention by Japanese authorities. A weaker yen, while typically supportive for exporters, has added to inflation concerns by raising import costs for energy and raw materials.

Energy Costs Reshape Risk Calculus

Japan, which imports roughly 90% of its crude oil, is among the Asian economies most exposed to the disruption in the Strait of Hormuz. The waterway handles about 20% of global oil shipments and has been a focal point of the US-Iran conflict since February.

The OECD on Wednesday warned that global economic growth could slow to 2.1% if the Middle East war continues into 2027, down from a 2.8% forecast if Gulf oil exports return to pre-conflict levels by the third quarter. Japan's economy, already navigating a fragile recovery, faces additional headwinds from higher energy costs that could squeeze corporate margins and household spending.

India approved a $1 billion support package for airlines on Wednesday to cushion the impact of soaring aviation fuel costs, while Bangladesh raised electricity prices by 16% and Japan's government backed $19 billion in additional spending to help households cope with rising costs.

Regional Markets Under Pressure

The Nikkei's decline tracked a broader risk-off move across Asia. South Korea's KOSPI fell as much as 3.3% on Tuesday, while the MSCI Asia-Pacific Index excluding Japan slipped 0.6%. Hong Kong's Hang Seng futures pointed to a weaker open.

The selloff in Tokyo contrasted with Wall Street, where the S&P 500 closed above 7,600 for the first time on Tuesday, supported by AI-related stocks. But S&P 500 e-mini futures fell 0.5% in after-hours trading, pointing to potential weakness ahead.

US Secretary of State Marco Rubio told lawmakers Wednesday that Iran had not yet agreed to a peace deal, with the fate of its highly enriched uranium stockpiles remaining a sticking point. Iran's foreign minister Abbas Araghchi said "no tangible progress" had been made in negotiations, though lines of communication remained open.

The Nikkei's reversal from a record high to a 1.2% decline shows how quickly sentiment can shift as geopolitical risks reassert themselves. With energy costs rising and ceasefire talks stalling, Japanese equities face a test of whether the AI-driven rally can withstand the headwinds from the Middle East.

This article is for informational purposes only and does not constitute investment advice.