Nikkei falls on profit-taking, options settlement eyed

Japan's Nikkei stock average edged lower to come off a nine-month high on Wednesday, as profit-taking in bank shares erased earlier gains made on upbeat earnings guidance from Toyota Motor Corp.

Weakness in Shanghai shares after a rate hike from China, its second move in six weeks to rein in surging inflation, helped dampen sentiment while investors also grew cautious before the settlement of Nikkei 225 February options on Thursday.

The Nikkei has gained about 15% on foreign buying since November, with the benchmark in the last few weeks benefiting from a shift in market focus to developed markets from emerging economies, which are seen as being at greater risk from inflation.

"Things have moved in a straight line for the past three months, so now they are coming off," said Mattia Ciancaleoni, director of equity sales at Citigroup.

"A switch to Japan may be over."

Futures were also hit by selling but shares in Toyota jumped after it raised its full-year outlook beyond market forecasts and as a US government panel cleared the company's electronics of causing unintended acceleration.

The benchmark Nikkei was down 0.2%, or 18.15 points, at 10,617.83 after rising as high as 10,701.92, its highest level since May 6.

The broader Topix was flat at 944.02.

"Investors started selling futures as they wanted to take profits from recent gains before tomorrow," said Hiroichi Nishi, general manager at Nikko Cordial Securities.

"When you bear in mind that autos, and Toyota is a large part of that, have accounted for over a half of Japan's GDP growth over the period 2002 to 2008, you realise how significant yesterday's strong earnings are," said Nicholas Smith, director of equity research at MF Global FXA Securities in Tokyo.

"The stock is trading barely over its price-to-book ratio, and on those present numbers, it stays on a lower price to book than the Topix itself so its valuations seem pretty attractive," he said.

Toyota rose 5.2% to 3,670 yen.

Bank shares trimmed gains on profit-taking, with Mitsubishi UFJ Financial Group ending flat at 456 yen, coming off an intraday high of 462 yen, and Mizuho Financial Group falling 1.8% to 166 yen, compared with an intraday high of 171 yen. The banking sector has added 21.47% since the beginning of last November.

Pixela Corp surged 30.2% to 345 yen after the electronics maker more than doubled its full-year net profit forecast on strong sales of liquid crystal display TVs thanks to a government incentive programme to encourage purchases of energy-efficient home appliances.

Dowa Holdings, a leading nonferrous metal manufacturer, tumbled 5.9% to 586 yen after UBS Securities cut its rating to "neutral" from "buy".

The brokerage said operating profit growth was ahead of plan, adding that the company had already attained 84% of the profit it had estimated in its full-year outlook.

Dowa posted an operating profit of 18.9 billion yen for the April-December period but kept its annual operating profit outlook at 22.5 billion yen.

Volume was moderate, with 2.3 billion shares changing hands on the Tokyo stock exchange's first section, which is in line with the last week's daily volume average of 2.2 billion shares.

Advancing shares were 778, compared with declining shares at 723.