Japan's Nikkei Falls for a Third Straight Day as Middle East Tensions Keep Oil Elevated

Japanese equity markets are having a rough week. The Nikkei 225 fell 0.97% to close at 60,816 on Monday, May 18, while the broader Topix Index shed the same to settle at 3,827, marking three straight sessions of losses for Japanese stocks.

The selloff is tied directly to the ongoing war in the Middle East. With the Strait of Hormuz dispute dragging on, oil prices have remained elevated, squeezing corporate costs and dampening investor appetite for risk. Technology shares led the losses this week, with Fujikura falling 2.9%, SoftBank Group down 2.7%, and Advantest sliding 0.8%.

But the pressure is not just coming from the Middle East. Japanese markets are also following Wall Street lower after a sharp selloff last Friday, when US Treasury yields surged on expectations that the Federal Reserve may need to raise interest rates to counter inflation tied to the energy crisis. That dynamic is bad news for Japanese equities, given how sensitive they are to shifts in American monetary expectations.

There were also company-specific developments weighing on sentiment. Mizuho Financial tumbled nearly 6% after reports emerged that it is considering an investment in Rakuten Bank, a move that worried investors about potential capital deployment at an uncertain time.

The broader context is still worth noting. Japan entered 2026 on a bullish footing, backed by a landslide election win for the LDP, a 17.7 trillion yen fiscal stimulus package, and corporate governance reforms that have driven meaningful improvements in shareholder returns. Bank of America had set a year-end Nikkei target of 55,500, and Goldman Sachs expected GDP growth of 0.8% for the year, led by domestic demand.

The question now is whether the Middle East situation extends long enough to derail that optimism. Spring wage negotiations delivered strong results this year, and the structural reform story remains intact. But for investors watching their portfolios this week, the noise is hard to ignore. The gap between Japan's longer-term narrative and its short-term market behavior is widening, and that gap is being filled entirely by geopolitics.