Japanese stocks slumped, led by declines in the tech sector as AI shares retreated from record highs amid rising expectations that the Federal Reserve will keep rates higher for longer following strong US jobs data.Traders are also increasing bets on a Bank of Japan rate hike when policymakers meet next week, as officials grapple with mounting upside risks to inflation. (Reuters/Representative Image)Heightening tensions in the Middle East further sapped risk appetite after Iran fired several rounds of missiles toward Israel while the US pushes to preserve a faltering ceasefire.The tech-heavy Nikkei 225 Stock Average dropped as much 4% as of 10:12 a.m. Tokyo time, its steepest decline since March 30. The broader Topix gauge slid as much as 2.9%, with electric appliances and machinery the biggest drags.“Selling is expected to spread across Japanese technology shares, while funds may rotate into defensive sectors,” said Shoji Hirakawa, chief global strategist at Tokai Tokyo Intelligence Lab. There are no signs of improvement in the standoff between the US and Iran, and investors are also inclined to wait for next week’s Fed decision, he said. “The market correction could persist for the time being.”Technology and AI-related stocks, including SoftBank Group Corp. and Kioxia Holdings, which reached record highs earlier this month, dropped after the Nasdaq 100 dropped about 5% and the Philadelphia Semiconductor Index slid 10% on Friday. Sentiment was dented after US job growth exceeded all forecasts in May, reinforcing expectations that the Fed may need to keep monetary policy restrictive for longer to contain inflation. SoftBank and Kioxia both fell more than 10% in morning trading.Concerns had already been mounting over lofty technology stock valuations and the sustainability of the AI-fueled rally. Japanese companies have also benefited from the boom, though to a lesser extent than their South Korean peers, with memory-chip maker Kioxia soaring more than 600% this year through Friday and SoftBank climbing nearly 70%.Traders are also increasing bets on a Bank of Japan rate hike when policymakers meet next week, as officials grapple with mounting upside risks to inflation.Investor sentiment is also likely to be weighed by escalating tensions in the Middle East after Iran launched multiple waves of missiles toward Israel. The Israel Defense Forces warned that additional barrages could follow, though it said all incoming missiles were intercepted or landed in open areas.Defensive sectors including pharmaceutical and telecommunications provided some support.ADVANCERSSumitomo Pharma (4506) 7%Toho/Tokyo (9602) 6.2%; Toho/Tokyo Shares Up 5.5%, Most in 11 Months as Topix DeclinesJapan Elevator (6544) 4.9%DECLINERSIbiden (4062) -11%; Asia ADR, GDR Equity Premium/Discounts for June 7Taiyo Yuden (6976) -10%TDK (6762) -10%INSIGHTSAll of the one sector indexes on the Tokyo Stock Exchange declined; Tokyo Stock Exchange TOPIX-17 Automobiles & Transportation Equipment Index was the worst performerThe Nikkei was down 3.6%Topix 500 is up 14% year-to-date, vs. Nikkei up 27%Topix 500 members are trading at 17.0 times their estimated earnings for the next 12 months.