By Junko Fujita

Japanese government bonds tumbled on Thursday on renewed fiscal concerns, while AI-related heavyweights dragged down the Nikkei share average after an overnight tech selloff on Wall Street.

The yen rose sharply against the dollar, with traders alert to the prospect of intervention to prop up the stubbornly weak currency.

The 10-year government bond yield (JP10YTN=JBTC) rose 7 basis points to 2.77%, the highest since mid-May, after a weak debt auction highlighted concerns about heavier government spending.

Japanese bond markets have been under pressure since the government outlined large spending plans in its latest policy blueprint this week and called on the Bank of Japan to align monetary policy with growth efforts.

"There has been a shock wave from the blueprint in the market," said Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset ​Management.

Inadome said the removal of wording on fiscal consolidation had revived concerns about borrowing.

Japan said combined public and private investment would exceed 370 trillion yen ($2.28 trillion) through fiscal 2040 as it works with the private sector to support strategic industries.

Investors worry that could mean more borrowing, while the Bank of Japan may be slow to raise rates as inflation pressure builds.

The benchmark Nikkei 225 TVC:NI225 slid 2.5% to 68,733.15, while the broader Topix TSE:TOPIX ended 0.09% higher, helped by buying in cheaper shares after recent declines.

Chip-related Advantest TSE:6857 and Tokyo Electron TSE:8035 fell 9.95% and 7.44%, respectively. Memory chip maker Kioxia TSE:285A dropped 13.47%.

"The market is going through a natural correction, where investors sold technology stocks to lock in profits and bought cheap stocks," said Kouji Toda, a senior fund manager at Resona Asset Management.

The Nikkei soared 37% last quarter, marking its sharpest advance in data going back to 1965.

Of the more than 1,500 stocks trading on the Tokyo Stock Exchange's prime market, 77% rose, 20% fell and 1% traded flat.

The yen FX_IDC:USDJPY traded near a 40-year low before jumping suddenly late in the session.