Tokyo stocks got off to a bumpy start Wednesday, the first trading day of 2023, with the Nikkei ending at a 10-month low amid fears that the Bank of Japan could move further toward monetary tightening and a firming yen against the U.S. dollar.

The 225-issue Nikkei Stock Average dropped 377.64 points, or 1.45 percent, from Friday to 25,716.86, its lowest close since March 15. The broader Topix index was down 23.56 points, or 1.25 percent, at 1,868.15. Japanese financial markets were closed Monday and Tuesday due to the New Year holidays.

Nearly all 33 industries on the Tokyo Stock Exchange fell, with marine transportation, mining, and precision instrument issues among the worst performers.

The U.S. dollar was little changed, mostly trading in the upper 130 yen range in Tokyo, after briefly slipping to the mid-129 yen zone on Tuesday, a level last seen in June, on expectations of a narrowing gap in long-term U.S. and Japanese interest rates.

People cheer at a ceremony at the Nagoya Stock Exchange on Jan. 4, 2023, to mark the first trading day of the year. (Kyodo)

The Nikkei fell below the psychologically important 26,000 mark as investors became increasingly wary of the BOJ shifting away from its ultraloose monetary policy after it surprised the market in December with its decision to raise its bond-yield ceiling, a move widely seen as a rate hike.

A news report during the year-end holidays that the central bank is considering revising upward its inflation outlook at its policy meeting later this month also added to the fears, prompting investors to brace for further monetary tightening and a firmer yen, analysts said.

Weaker-than-expected Chinese manufacturing-related data released during the Japanese holidays as well as overnight losses in U.S. stocks also dampened investors' hopes that stocks tend to "jump" in the Year of the Rabbit as described in a stock market proverb, according to analysts.

Currency monitors at a foreign exchange trading company in Tokyo show the U.S. dollar falling to the upper 129 yen level, its lowest level in about seven months, on Jan. 3, 2023. (Kyodo) ==Kyodo

"Some investors thought stocks would rise (with the festive mood) because today was the first trading day of the year but it didn't go as they had expected," said Toshikazu Horiuchi, equity strategist at IwaiCosmo Securities Co.

"So they were cautiously watching how the market moves after selling some of their holdings that rose recently," he said.

Shares sensitive to economic fluctuations were lower due to the worsened sentiment. Marine transporter Nippon Yusen fell 202.5 yen, or 6.5 percent, to 2,907.5 yen. Oil explorer Inpex slid 59 yen, or 4.2 percent, to 1,337 yen.

Japanese Finance Minister Shunichi Suzuki rings the bell to start the year's first trading at the Tokyo Stock Exchange on Jan. 4, 2023. (Kyodo)

Some export issues also slipped amid the yen's strengthening trend. Mitsubishi Motors lost 28 yen, or 5.5 percent, to 482 yen, while Mazda Motor sank 30 yen, or 3.0 percent, to 975 yen.

Bucking the trend, financial stocks rose on hopes that BOJ's potential shift toward a more hawkish stance may lead to higher interest rates and boost their earnings.

Mitsubishi UFJ Financial Group gained 37.2 yen, or 4.2 percent, to 926.2 yen. Mizuho Financial Group advanced 56.5 yen, or 3.0 percent, to 1,912.5 yen.

Among Prime Market issues, declining issues outnumbered advancers 1,584 to 213, while 41 ended unchanged.

Trading volume on the Prime Market rose to 1,244.87 million shares from Friday's 881.80 million.

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