The Bank of Japan kept its interest rate at 1.25 per cent on Friday. While inflation hit its 2 per cent target, the Nikkei 225 fell 2.8 per cent. Maki Sawada said, "concerns about the profitability of AI investments were weighing on technology stocks," as many semiconductor shares got hit hard.

The Bank of Japan (BOJ) kept its benchmark interest rate unchanged at 1.25 per cent on Friday, but signalled that further monetary tightening could be on the horizon after indicating that underlying inflation has reached its 2 per cent target.

The decision followed a two-day monetary policy meeting and was in line with expectations. All economists surveyed by Bloomberg had predicted that the central bank would leave interest rates unchanged.

However, the BOJ's latest assessment of inflation is significant. For the first time, the central bank indicated that underlying inflation had reached its 2 per cent target, strengthening the case for another interest rate increase.

Japan's stock market falls as AI concerns hit technology shares

The BOJ's policy decision came on a difficult day for Japanese equities.

The Nikkei 225 fell as much as 3 per cent during Friday's session, with technology and semiconductor-related stocks leading the decline. It was down 2.8 per cent at 2003 GMT.

The sell-off followed overnight losses on Wall Street, where concerns about the sustainability and profitability of massive investments in artificial intelligence weighed on technology shares.

Results from Amazon and Intel added to investor concerns after highlighting the scale of spending and cash requirements associated with the technology boom.

Japanese semiconductor companies, which have benefited from global demand for AI-related equipment and infrastructure, were among the biggest losers.

Other major decliners included Ibiden, which fell 15.2 per cent, Lasertec, down 13.8 per cent, and SoftBank Group, which lost 6.7 per cent.

Maki Sawada, an equities strategist at Nomura Securities, said concerns about the profitability of AI investments were weighing on technology stocks.

The broader Topix index performed relatively better, falling 1.3 per cent on Friday.

Despite the decline, the Nikkei remained up 0.2 per cent for the week, while the Topix was set to finish the week 0.4 per cent lower.