Japan's Nikkei falls over 1% as chip-related shares track Nasdaq lower

Updates with closing prices

TOKYO, Jan 28 (Reuters) - Japan's Nikkei share average fell more than 1% on Tuesday as heavyweight chip-related stocks tracked an overnight drop in the tech-heavy Nasdaq index in the U.S. but gains in bank shares helped the Topix trim early losses.

The Nikkei .N225 slipped 1.39% to close at 39,016.87.

The broader Topix .TOPX inched down 0.04% at 2,756.9, recouping most of its 0.8% loss earlier in the session.

The Nasdaq index .IXIC posted its biggest one-day drop since Dec. 18 overnight as a low-cost Chinese artificial intelligence model prompted a steep sell-off in U.S. chipmakers, led by AI leader Nvidia NVDA.O. .N

U.S. semiconductor chip index .SOX dropped 9.2% in its biggest single-day fall since March 2020.

"Unless this trend of a sell-off of chip shares ends in Wall Street, Japanese market will continue to see this market move," said Yusuke Sakai, a senior trader at T&D Asset Management.

"But the money has not run away from Japan. It is just that investors sold shares that rallied, meaning chip-related shares, and bought back bank and other value stocks with those money."

Chip-testing equipment maker Advantest 6857.T, a supplier to Nvidia, dropped 11% and chip-making equipment maker Tokyo Electron 8035.T fell 5.94%.

Bank shares rose on expectations the Bank of Japan would raise interest rates at a faster pace than the market had expected.

Mitsubishi UFJ Financial Group 8306.T and Mitsui Sumitomo Financial Group 8316.T climted more than 2% each.

The BOJ on Friday raised rates by 25 basis points to 0.5%, the highest since the 2008 global financial crisis.

The Topix's value share index .TOPXV, which tracks shares with slower growth but pay higher dividend such as banks, rose 0.29%. The growth share index .TOPXG - tracking faster growing shares such as technology - fell 0.39%.

Of the Nikkei's 225 components, half of the shares rose.