Japan's Nikkei falls as tech shares track Nasdaq lower

TOKYO, Jan 28 (Reuters) - Japan's Nikkei share average fell on Tuesday as heavyweight chip-related stocks tracked an overnight drop in the Nasdaq, with a stronger yen also weighing on investor sentiment.

By 0059 GMT, the Nikkei .N225 had declined 1.3% to 39,045.81, while the broader Topix .TOPX was up 0.36% at 2,768.43 after trading lower in early trade.

The Nasdaq .IXIC posted its biggest one-day percentage drop since Dec. 18 on Monday as a low-cost Chinese artificial intelligence model prompted a steep sell-off in U.S. chipmakers. .N

An index of U.S. semiconductor stocks .SOX dropped 9.2% in its biggest single-day percentage fall since March 2020 as Chinese startup DeepSeek rolled out a free assistant it says uses cheaper chips and less data.

Overnight, the Japanese yen JPY=EBS rose nearly 1% against the dollar to its strongest since mid-December amid the sell-off in U.S. technology shares. FRX/

A stronger Japanese currency tends to hurt shares of exporters, as it decreases the value of overseas profits in yen terms when firms repatriate them to Japan.

In Japan, chip-testing equipment maker Advantest 6857.T, a supplier to Nvidia NVDA.O, dropped 10% to drag the Nikkei the most. Chip-making equipment maker Tokyo Electron 8035.T fell 5.3%. Technology start-up investor SoftBank Group 9984.T lost 6%.

"The declines might remind us of a big market swing (in early August) after the Bank of Japan (BOJ) raised its policy rate in July," said Kazuo Kamitani, an equities strategist at Nomura Securities.

But he said there were a few differences now that could support the stock market, pointing out the firmness of the U.S. economy. The BOJ is not as hawkish as it was in July, he said.

The BOJ on Friday raised interest rates by 25 basis points to 0.5%, highest since the 2008 global financial crisis, and revised up its inflation forecasts.

Uniqlo-brand owner Fast Retailing 9983.T rose 1.15% to become the biggest support for the Nikkei.

Banks rose, with Mitsubishi UFJ Financial Group 8306.T and Mitsui Sumitomo Financial Group 8316.T up 3% and 4.3%, respectively.