* Japan export data drags machinery makers
* Banks, insurers outperform on rising U.S. yields
By Ayai Tomisawa
TOKYO, Oct 18 (Reuters) - Japan's Nikkei fell on Thursday in choppy trade, as hawkish minutes from the U.S. Federal Reserve's last policy meeting knocked global sentiment and a surprise decline in exports hit machinery makers.
The Nikkei share average dropped 0.5 percent to 22,720.88 at the midday break, after opening a tad higher.
The index has fallen around 7 percent since its 27-year peak hit on Oct. 2, as concerns around rising debt yields and worries about the slowing Chinese economy gripped equity markets world-wide.
On Wednesday, the Fed's minutes for its September meeting showed all policy makers agreed to raise key interest rates for a third time in 2018 with many open to further hikes.
"Investors are reminded about the reasons for last week's selling and they've become guarded against those negative risks again," said Shogo Maekawa, a global market strategist at JPMorgan Asset Management. "Caution against rising yields will likely cap the Japanese market's upside for a while."
Machinery makers were battered after economic data showed Japan's exports unexpectedly fell in September from a year earlier, the first decline in 22 months.
Japanese exporters, especially factory automation equipment makers, which are already been under pressure on worries about slowing demand in China, were particularly hit. Yaskawa Electric tumbled 5.9 percent and Fanuc Corp plunged 4.3 percent.
Machine tool makers also declined, with Okuma Corp tanking 5.2 percent, Makino Milling Machine dropping 3.9 percent and Tsugami Corp falling 1.9 percent.
"There may be a technical rebound in these stocks, but they may stay basically weak as long as worries about the Chinese economy persist," said Chihiro Ohta, general manager at SMBC Nikko Securities.
Banks and insurers, which hunt for higher-yielding products, found support after U.S. Treasury yields rose overnight.
Mitsubishi UFJ Financial Group gained 0.8 percent, T&D Holdings soared 1.4 percent and Sompo Holdings added 0.4 percent.
The broader Topix declined 0.2 percent to 1,709.71. (Editing by Sam Holmes)