Japan's Nikkei down nearly 1% as tech shares stumble

Updates for market close

By Brigid Riley

TOKYO, Jan 27 (Reuters) - Japan's Nikkei share average shed nearly 1% on Monday as technology stocks slumped following last week's rally, with investors sizing up the impact of a Chinese AI startup on U.S. tech dominance.

The Nikkei .N225 closed down 0.9% at 39,565.80 after initially rising in early trade, while the broader Topix .TOPX finished up 0.3% at 2,758.07.

Heavyweight technology shares saw sizeable losses, backtracking from gains made last week on news of U.S. investment plans to fund infrastructure for artificial intelligence.

Market players are watching DeepSeek after the Chinese AI startup rolled out an open-source reasoning model called DeepSeek-R1 that it said rivalled OpenAI's o1 on several performance benchmarks.

"There's concern that the view of American cutting-edge technologies from companies like Nvidia and (OpenAI) as the most globally dominant might start to change a bit," said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management.

Advantest 6857.T, which counts U.S. chip darling Nvidia NVDA.O among its customers, declined 8.6% to become the biggest drag on the Nikkei. AI-focused startup investor SoftBank Group 9984.T was down 8.3%.

U.S. stock futures also dipped during Japan trading hours after Wall Street's main indexes closed lower on Friday dragged by the technology sector .SPLRCT. .N

Japan's stock market received some support after the Bank of Japan's monetary policy concluded on Friday without a fuss, with the central bank raising interest rates as widely expected. Markets are still only expecting another 25 basis points of tightening this year. 0#JPYIRPR

Exporter shares including automaker giant Toyota Motor 7203.T and peer Honda Motor 7267.T gained as the yen hovered around the upper 155 range per dollar.

Of the Nikkei's 225 constituents, 175 were up.

Among big-name shares, chip-making equipment giant Tokyo Electron 8035.T stumbled 4.9% and electronics component maker Fujikura 5803.T slid 10.7%. Uniqlo parent Fast Retailing 9983.T added 0.6%.