TOKYO, Jan 16 (Reuters) - Japan's Nikkei share average slumped 1% on Monday, with exporters feeling the pressure from a stronger yen as investors bet the Bank of Japan could be forced to tweak stimulus settings again as soon as this week.
The Nikkei lost 1.01% to 25,855.38 as of the midday break, after earlier plunging through the psychological 26,000 line to as low as 25,748.10 for the first time since Jan. 6.
The broader Topix shed 0.56% to 1,892.33.
The yen reached its strongest since May at 127.215 per dollar with speculators ramping up wagers that the BOJ's yield curve controls are becoming untenable amid rising inflationary pressure.
The central bank sets policy on Wednesday, after shocking markets last month by doubling the band that it lets the 10-year Japanese government bond yield move around zero, to a range of -0.5% to 0.5%.
The benchmark yield exceeded that target for a second day on Monday, reaching 0.51%.
"We tend to think that the market reactions have been a bit excessive," said Yunosuke Ikeda, chief equity strategist at Nomura.
"Buying of banks and selling of Nikkei 225 futures was based on rapid normalization (of policy) by the BOJ, which is unlikely to happen."
Ikeda expects some reversal of recent moves after Wednesday's BOJ decision, and forecasts the Nikkei to be at 26,500 by end-March.
Bank stocks already saw investors taking money off the table on Monday after last week's surge to a five-year high. Banking was the worst performer among the Tokyo Stock Exchange's 33 industry groups, dropping 2.05%.
Automakers were weak, with Nissan sliding 1.74% and Suzuki dropping 2.34%.
Uniqlo store operator Fast Retailing tumbled 1.88%
Nintendo, though, bounced 0.5%, but after dropping to a nearly one-year trough at the start of the session.
Chemical company Denka was Nikkei's biggest decliner by far, plunging 15.89% after cutting earnings forecasts.
Notable winners included internet group CyberAgent, rising 1.61% after subsidiary Babel Label entered a strategic partnership with Netflix.
Drugmaker Eisai added 1.57% after it announced it had submitted a marketing authorisation application in Japan for its Alzheimer's drug lecanemab. (Editing by Uttaresh.V)
