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Nikkei drops as Fed caution weighs on sentiment; chip shares soar

Ayai Tomisawa

* Tokyo Electron, Advantest soar after Micron resumes some shipments to Huawei

* Lixil jumps after former CEO reinstates

TOKYO, June 26 (Reuters) - Japan's Nikkei fell on Wednesday after the U.S. Federal Reserve chairman pushed back on pressure from President Donald Trump to cut interest rates, although chip-related stocks gained.

The Nikkei share average dropped 0.5% to 21,086.59

Federal Reserve Chairman Jerome Powell on Tuesday said the U.S. central bank is "insulated from short-term political pressures," as policymakers faced new calls by Trump to cut interest rates.

Separately, St. Louis Fed President James Bullard in an interview with Bloomberg said he did not think the central bank needs to cut rates by a half-percentage point at its next policy meeting in late July.

"The Fed and the Bloomberg report chilled investor sentiment towards U.S. monetary policy a bit, but I don't think that fundamental hopes for rate cut have changed," said Takuya Takahashi, a strategist at Daiwa Securities.

Investors also await the outcome of the G20 summit this week, where Trump will talk with Chinese President Xi Jinping on trade.

Expectations for that meeting so far appear to be low. The best-case scenario would be a resumption of official talks, which could ease financial market fears that the trade dispute might continue indefinitely. Escalating tensions have pummelled markets and hurt trade-reliant economies such as Japan's.

"The outcome should give some kind of direction to the market," Takahashi said.

Chip equipment makers bucked the weakness and gained after Micron Technology Inc said on Tuesday it had resumed some microchip shipments to Huawei Technologies Co Ltd and still expects demand for its chips to recover later this year.

Tokyo Electron surged 2.2% and Advantest Corp jumped 3.5%.

Other exporters lost ground, with Honda Motor Co falling 1.3%, Daikin Industries declining 1.1% and Canon Inc shedding 2.6%.

Toilet maker Lixil Group Corp jumped 16% after its former chief executive was reinstated on Tuesday on shareholders' backing at an annual general meeting, which was seen as a win for minority shareholders.

The broader Topix shed 0.6% to 1,534.34. (Editing by Sam Holmes)