Japanese AI Software Stocks Soar as DeepSeek Inspires Cost-Effective Innovation

The success of Chinese startup DeepSeek in developing advanced generative AI using less sophisticated hardware is triggering a shift in Japan's AI market, Nikkei Asia reports. Software companies are emerging as the new driving force behind AI stock growth, while hardware-related companies face increasing uncertainty.

DeepSeek's breakthrough, announced last month, demonstrated that cutting-edge AI can be developed with fewer, less advanced chips. This revelation has emboldened Japanese AI developers, including leading AI company Preferred Networks.

"If talented engineers work on it for about six months to a year, even companies with few GPUs can imitate it," said Daisuke Okanohara, chief executive researcher at Preferred Networks, referring to the development of advanced AI.

The stock market is reflecting this shift. Comparing Wednesday's stock prices to those on January 24, before DeepSeek's breakthrough became widely known, hardware-based companies like Fujikura (down 14%) and Advantest (down 16%) experienced significant declines.

Meanwhile, AI software companies like NEC (up 17%) and Nomura Research Institute (up 15%) saw substantial gains. These companies ranked among the top five Nikkei Average stocks in terms of price increases during that period.

This surge in software stock prices is attributed to the growing expectation that AI services will become more widespread due to the low-cost approach demonstrated by DeepSeek.

"The level of excitement seems more pronounced in Japan than in the U.S.," Nikkei Asia reports. Based on data from January 24, U.S. AI software stocks have risen an average of 1%, while Japanese stocks have risen 8% as of Wednesday.

NEC, a company known for its cost-effective, high-performance AI models, is a prime example of this trend. The company ranks 10th globally in papers submitted to prestigious international AI conferences.

"We expect NEC's domestic AI services to become more widely used, boosting earnings," said Kosei Mikuni of Nissay Asset Management, which has included NEC shares in its active funds as a top stock.

Japan's relative lack of investment in cutting-edge GPUs is a major factor in the shift towards software-focused AI development.

"In addition to the unknown impact of DeepSeek, price movements have become large, and AI-related stocks are increasingly seen as risky," said Rina Takeda, head of equity sales at Citigroup, during a discussion with a hedge fund. Takeda expects AI stocks to remain volatile as investors reassess their positions in data center and semiconductor stocks.