Two of Japan's largest securities groups, Nomura Holdings and Daiwa Securities Group, saw their leaders strike an unusually unified tone on the same day: the powerful rally in Japanese equities is expected to extend through 2027 and possibly beyond, but a potential reversal in sentiment toward artificial intelligence (AI) investment stands as the foremost threat facing the market today.

"The current market, share prices, and corporate earnings are all strongly driven by AI-related investment," Nomura Holdings Chief Executive Officer Kentaro Okuda said Thursday at an event in Tokyo. "Once market sentiment toward AI turns and this trend reverses, it will bring significant risk." Akira Ogino, chief executive of smaller rival Daiwa Securities Group, expressed a similar view during the same panel discussion.

The two Japanese brokerage chiefs also specifically noted that recent public opposition to AI and data centers in the United States and elsewhere could lead to a decline in investment in the sector. In multiple regions across Europe and the United States, large-scale data center construction has triggered widespread controversy over electricity consumption, water usage, and community impact, with some local governments beginning to impose stricter approval conditions on data center projects. This kind of public resistance could, through policy transmission mechanisms, place substantive constraints on the capital expenditure plans of technology giants.

"What warrants the most vigilance is the reaction of market participants," Ogino said. "Market sentiment can reverse dramatically in an extremely short period, triggering sharp swings in asset prices. Such market volatility amplifies risk, and its impact will far exceed changes in the real economy itself. I believe this is the biggest challenge."

This warning aligns closely with the judgments of other large institutional investors globally. Rohit Sipahimalani, chief investment officer of Singapore state investment giant Temasek, said this week that a reversal in the AI trade is the biggest risk facing the market. "We don't think it's imminent, but will there be bumps in 2027? Yes, possibly." He noted that despite a sharp rise in U.S. Treasury yields, AI remains a key force supporting U.S. equities near record highs, but strength at the index level masks underlying weakness — roughly half of the constituents in the Russell 3000 are down at least 20% from their June highs, highlighting how much the market's resilience depends on a handful of winners.

Multiple Drivers Behind a Four-Year Bull Market

Nevertheless, before any reversal in AI sentiment, the two executives still predict the Nikkei 225 will eventually reach the 80,000 mark, though they differ significantly on the path to get there. Ogino expects that target to be achieved this year and further projects the index will climb to 88,000 around the end of 2027. Okuda takes a relatively cautious stance, expecting the index to be around 75,000 by year-end and to break through 80,000 by the end of 2027.

The Nikkei 225 closed Thursday at 69,042.11 points, implying upside of more than 8% even under Okuda's conservative forecast, while Ogino's target implies roughly 16% upside potential.

The two executives' firm bullishness on Japanese stocks is built on a historic bull market that has now lasted nearly four years. Japanese equities are currently approaching record highs, driven by three powerful forces: the AI investment wave, corporate governance reform, and the improved investment appeal brought by the return of inflation.

Continuous inflows of foreign capital have become the most important funding-side support for this rally. According to data from Japan's Ministry of Finance, net purchases of Japanese cash stocks by overseas investors exceeded 10 trillion yen in the first half of 2026, five times the level of the same period a year earlier and a record high on a half-year basis.

Corporate governance reform has provided institutional support for the revaluation of Japanese equities. In July 2026, Japan's Financial Services Agency and the Tokyo Stock Exchange jointly released a revised version of the Corporate Governance Code after a five-year gap, requiring boards to more actively manage and disclose the use of cash reserves and capital efficiency. This reform continues the TSE's governance campaign since 2023 targeting companies trading below book value, steadily guiding Japanese companies to raise shareholder returns.

At the same time, Japan's economy is undergoing its strongest wage growth cycle in decades. The average increase in the 2026 "shunto" wage negotiations reached 5.01%, exceeding the 5% target for a third consecutive year and marking the first "three-peat" since 1989-1991. Sustained wage gains provide a fundamental basis for the Bank of Japan to exit ultra-loose monetary policy and inject momentum into consumption-driven economic growth.

The AI investment reversal risk warned about by Okuda and Ogino unfolds against the backdrop of an unprecedented global capital expenditure wave. Goldman Sachs estimates that global AI capital spending on computing, data centers, and power will reach about $7.6 trillion between 2026 and 2031, with annual outlays climbing from $765 billion in 2026 to $1.64 trillion in 2031. For the five hyperscale cloud providers alone — Microsoft (MSFT.US), Alphabet (GOOGL.US), Amazon (AMZN.US), Meta (META.US), and Oracle (ORCL.US) — capital expenditure is expected to reach about $795 billion in 2026 and approach $1.08 trillion in 2027.

This capital market boom has also translated directly into an earnings surge for the two brokerages, with both posting record profits in the previous fiscal year.

Yen Outlook

The two executives also diverge on their forecasts for the yen exchange rate. Ogino expects the dollar-yen pair to trade around 160 throughout the forecast horizon through the end of 2027. Okuda predicts the dollar-yen rate will be around 156 at year-end and then gradually strengthen as geopolitical concerns ease.

Ogino attributed the yen's recent recovery from excessive weakness to joint intervention, U.S. Treasury Secretary Bessent's call for the Bank of Japan to raise rates, and the central bank's September rate hike. He also described the rate increase as a "positive signal" reflecting economic growth. Okuda said overseas investors remain strongly interested in Japan, and the negative impact of rate hikes so far has not been significant. He added that conflicts in the Middle East and between Russia and Ukraine could become prolonged, potentially pushing up energy prices and disrupting supply chains.