Japan shares rise as bond yields retreat; tech jitters weigh on Nikkei

By Kevin Buckland

TOKYO, Dec 23 (Reuters) - Japanese stocks rose on Tuesday as a retreat in domestic bond yields from record highs lifted sentiment, although persistent worries about artificial intelligence-linked share valuations capped gains for the tech-heavy Nikkei.

The broader Topix .TOPX climbed 0.5% to end at 3,423.25, putting it not far from the record high of 3,434.60 hit earlier this month.

However, the Nikkei .N225 ended flat at 50,412.87, with heavily weighted chip-testing tool maker Advantest 6857.T offsetting the advance by the majority of shares in the index. Of the Nikkei's 225 components, 162 rose versus 62 decliners, with one ending flat.

Japanese government bond (JGB) yields declined across maturities as calm returned to the market following a two-day spike to all-time peaks.

Yields have risen as traders positioned for further interest rate hikes after the Bank of Japan raised borrowing costs to a three-decade high on Friday, while also preparing for increased bond supply to fund the new government's fiscal stimulus.

"The retreat in yields is supporting the overall stock market," said Maki Sawada, an equities strategist at Nomura Securities.

At the same time, "there are still some worries about AI stock valuations, which is weighing on the Nikkei," she said. "There's no particular bad news that's acting as a trigger - it's just a pullback after such a substantive rally."

Advantest sank 1.9%, and chip-making equipment manufacturer Tokyo Electron 8035.T lost 0.5%, while artificial intelligence-focused startup investor SoftBank Group 9984.T also declined 0.5%.

That's despite advances for U.S. chip stocks overnight, which helped all three main Wall Street indexes to post gains.

Even with JGB yields coming down, expectations for further BOJ policy tightening continued to support banks and securities firms, as an improved outlook for lending and investing supported the sectors.

Banks .IBNKS.T gained 1% and insurers .IINSU.T added 1.4%, while securities firms .ISECU.T and other financial companies .IFINS.T each jumped 1.5%.

They were among the best performers in the Tokyo Stock Exchange's 33 industry groups.

Only three sectors fell, with the worse performer being automakers and suppliers .ITEQP.T, which dropped 1.1% as a rebounding yen dented the value of offshore revenues.

Mazda 7261.T and Subaru 7270.T, which are most dependent on U.S. sales, were the biggest percentage decliners on the Nikkei, each slumping 2.9%. Toyota 7203.T declined 1.2%.