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 had declined 1.3% to

39,045.81, while the broader Topix was up 0.36% at

2,768.43 after trading lower in early trade.

The Nasdaq 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.

An index of U.S. semiconductor stocks 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 rose nearly 1%

against the dollar to its strongest since mid-December amid the

sell-off in U.S. technology shares.

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 ( ADTTF ), a

supplier to Nvidia ( NVDA ), dropped 10% to drag the Nikkei the

most. Chip-making equipment maker Tokyo Electron ( TOELF ) fell

5.3%. Technology start-up investor SoftBank Group 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 ( FRCOF ) rose 1.15% to

become the biggest support for the Nikkei.

Banks rose, with Mitsubishi UFJ Financial Group ( MUFG ) and

Mitsui Sumitomo Financial Group up 3% and 4.3%,

respectively.

(Reporting by Junko Fujita; Editing by Subhranshu Sahu)