This week, a significant upheaval has shaken the Japanese semiconductor sector, following the phenomenal rise of China's indigenous AI model, DeepSeek, which has gone viral overseas. Investors are increasingly worried that the United States may be losing its foothold as the global leader in artificial intelligence, which has turned the spotlight on Japanese tech firms embedded in the American AI ecosystem. Consequently, a wave of panic selling swept through the markets, leading to substantial declines in the stock prices of these companies.

The consequences for Japanese tech stocks were drastic. On Monday, shares of Advantest, a supplier of semiconductor testing equipment and a critical player in the Nvidia supply chain, plummeted, showing a decline of 8.76% at the time of writing. Other companies such as Tokyo Electron and Renesas Electronics didn't fare much better, experiencing dips of nearly 5% and 0.89%, respectively.

In a shocking twist, SoftBank Group, which owns Arm, displayed extreme volatility in its stock performance. On Monday, under immense pressure, its shares dropped by more than 8%, leaving investors stunned. Just a week prior, SoftBank's CEO Masayoshi Son had boldly proclaimed plans for a staggering $500 billion investment in data centers across the United States, igniting a surge of optimism that propelled the company's stock prices up. However, just seven days later, the severe drop had nearly erased all the gains made during what seemed to be a bullish period. Such drastic fluctuations not only distressed investors but also raised various speculations about the future direction of SoftBank Group.

Andrew Jackson, Head of Equities at ORTUS Advisors, attributed the mass sell-off chiefly to apprehensions surrounding DeepSeek. "We are witnessing a major sell-off in Japanese semiconductor stocks as investors pivot from growth stocks to value stocks," he explained.

Furthermore, he pointed out that stocks linked to data centers, which have benefited from increased spending on tech infrastructure, are also starting to feel the heat. Companies like Furukawa Electric and Fujikura also reported significant declines of 11.67% and 10.4%, respectively.

Veteran investor Cole expressed his concerns, stating that China's rapid advancements in AI are challenging the ambitions of Japan's tech industry. "We recognize that Japanese chip manufacturers can be world-class, but their mass production capabilities are limited. It's entirely reasonable to be concerned that their execution speed may lag behind new developments coming out of China," Cole remarked.

Meanwhile, will the American stock market face its own turmoil as a result of these developments? Last week, China's quantitative giant, Quantum Dimension, unveiled its large AI model, DeepSeek-R1. The model's performance in fields such as mathematics, programming, and logical reasoning rivals OpenAI's strongest reasoning model, o1. It’s imperative to note that DeepSeek's training costs reportedly amount to just one-thirtieth of OpenAI's latest large models. This dramatic innovation represents a major milestone in the realm of AI, but it has also stirred up a wave of concern within overseas tech communities. Many are beginning to question the significance of the enormous investments made by numerous large American tech companies into AI models and data centers.

Junrong Yeap, a market strategist with IG, observed, "While the long-term viability of DeepSeek as a cheaper alternative remains to be seen, the initial concerns are centered on whether the pricing power of American tech giants is under threat and whether their extensive expenditure on AI needs reassessment."

As a testament to its popularity, DeepSeek has already surpassed ChatGPT, becoming the most downloaded free app in the Apple App Store in the United States.

As Japanese chip stocks experience these declines, the Nasdaq index futures also faced a continuing downturn, with the losses widening to over 2% in the afternoon session. "Based on the trends in Nasdaq futures, it appears that the US stock market may also undergo a challenging phase this evening," Jackson added.

Even Nvidia finds itself in a precarious position. Chamath Palihapitiya, a well-known Silicon Valley venture capitalist and CEO of Social Capital, took to social media platform X to share his thoughts on DeepSeek. "With such inexpensive models, many new products and experiences can now emerge, trying to win over the hearts and minds of people worldwide," he stated.

He lamented, "The innovation coming out of China highlights how 'asleep' we've been over the last 15 years. We have tended to throw massive amounts of money and glitzy spending plans (AI is not the first, nor will it be the last), with the American team pouring hundreds of billions into one issue rather than thinking smarter and using resource constraints as a motivator."

As a result of DeepSeek's advent, capital markets are expected to reassess the valuation of the "Big Seven" companies in the US stock market, leading to unavoidable volatility. According to Palihapitiya, among these giants, "Tesla's risk exposure is the least, while the risk exposure of the other companies directly correlates to their publicly announced capital spending figures. For obvious reasons, Nvidia is expected to face the most substantial risks."