Japan's Nikkei wobbles as AI stock selloff, rising bond yields weigh

TOKYO, Sept. 1 (Reuters) - Japan's Nikkei share average edged lower on Tuesday in largely directionless trading as investors rotated out of heavyweight technology stocks into other sectors, while a sharp rise in bond yields weighed on overall risk sentiment.

The tech-heavy Nikkei .N225 was down 0.2% at 66,173.86, as of 0200 GMT, although the benchmark flitted between losses and gains in early trade.

The broader Topix .TOPX rose 0.5% to 4,178.62.

Both Japanese and U.S. government bond yields rose to fresh highs on Tuesday, as continued uncertainty in the Middle East kept oil prices elevated and stoked bets for monetary tightening by the Bank of Japan and Federal Reserve.

AI-related names were the standout losers, with heavily weighted chip-making tool manufacturer Tokyo Electron 8035.T and chip-testing equipment maker Advantest 6857.T the top two drags on the Nikkei, falling 3.4% and 1.6%, respectively.

The biggest decliners in percentage terms were cable makers Furukawa Electric 5801.T and Fujikura 5803.T, both major beneficiaries of the data centre boom, which lost 4.9% and 3.9%, respectively. Silicon company Sumco 3436.T sank 4.1%.

"It appears that a sector rotation, albeit likely a short-term one, is currently taking place in the market," said Nomura Securities strategist Wataru Akiyama, pointing to auto shares as one of the beneficiaries.

"When looking at the Japanese stock market as a whole, I believe the underlying (bullish) trend remains firm."

Shares of Toyota 7203.T and Nissan 7201.T each rose 3.1%.

The Nikkei's biggest percentage riser was Tokyo Electric Power Company 9501.T, up 5.1%.

Of the index's 225 components, 168 rose versus 54 that fell, with three trading flat.