Japan Tech Selloff Extends as DeepSeek Pressures AI Stocks

The global tech market is grappling with a significant selloff, with Japanese tech stocks bearing the brunt of the downturn. The emergence of DeepSeek, a low-cost Chinese artificial intelligence model, has sparked concerns about the dominance of U.S. tech giants and triggered a wave of investor uncertainty. This article explores the factors contributing to the selloff in Japanese tech stocks and its potential implications for the broader global tech market.



Concerns about AI dominance and competition

The launch of DeepSeek, a free, open-source large-language model, has raised eyebrows worldwide. The model, developed in just two months at a cost of under $6 million, claims to be a cheaper alternative to existing AI services. This has led to concerns about the large amounts of money big tech companies have been investing in AI models and data centers, with investors dumping tech stocks globally (Source: Reuters, 2025-01-28).

In Japan, chip-testing equipment maker Advantest, a supplier to Nvidia, lost 10% on Tuesday after diving nearly 9% on Monday. Chip-making equipment maker Tokyo Electron fell 5.3%, while technology start-up investor SoftBank Group was 6% lower. These declines reflect the broader selloff in tech stocks and the concerns about the potential impact of DeepSeek on U.S. AI companies, which are major clients and partners of Japanese tech firms.

Crowded positioning and high valuations

The selloff has brought into the spotlight the crowded positioning among investors and the extremely high valuation of some of these firms. David Bahnsen, chief investment officer at The Bahnsen Group, noted that the valuations of many AI and tech companies offer no margin of error, and the excessive weighting these tech stocks have in many investor portfolios and market indices was a significant and under-appreciated risk issue (Source: The Bahnsen Group, 2025-01-28).

The hype around AI has powered a huge flow of capital into equities in the last 18 months, inflating valuations and lifting stock markets to record highs. However, the emergence of DeepSeek has raised questions about the sustainability of these valuations and the dominance of U.S. AI companies. If DeepSeek proves to be a viable, cheaper alternative in the long term, it could threaten the pricing power of U.S. tech giants and force them to reevaluate their massive AI spending.

Supply chain and geopolitical risks

Japan's tech industry is heavily dependent on the U.S.-led AI value chain. Concerns about a potential challenge to America's global leadership in AI from China, as well as U.S. semiconductor restrictions on China, have raised geopolitical risks for Japanese tech companies (Source: CNBC, 2025-01-28). The selloff in Japanese tech stocks may be a reflection of these geopolitical tensions and the uncertainty they create for the global tech market.

Data center-related shares

The selloff has also affected data center-related shares, which were previously boosted by higher technology infrastructure spending. This could indicate a broader reassessment of tech spending and valuations (Source: Reuters, 2025-01-28). The uncertainty surrounding the future of AI and the potential impact of cheaper alternatives like DeepSeek may be contributing to this reassessment.

In conclusion, the selloff in Japanese tech stocks reflects investors' concerns about the dominance of U.S. AI companies and the potential impact of cheaper alternatives like DeepSeek. The high valuations and crowded positioning of these companies have made them more vulnerable to market fluctuations, while supply chain and geopolitical risks further exacerbate the uncertainty. The situation highlights the importance of diversification and risk management in investment portfolios and the need for tech companies to adapt to the changing landscape of AI.