Nikkei slips amid caution ahead of German ruling, Fed

* Cyclicals fall as investors pocket gains
* Japan Tobacco rebounds from 2 days of losses

By Dominic Lau
TOKYO, Sept 11 (Reuters) - Japan's Nikkei average fell on
Tuesday as investors were cautious ahead of the German
constitutional court's ruling over the legality of the European
bailout fund on Wednesday and the U.S. Federal Reserve policy
meeting this week.
The Nikkei dropped 0.8 percent to 8,800.35, holding
above the support level of its five-day moving average at
8,780.35.
Cyclical stocks, which have a relatively high correlation to
the health of the economy, came under pressure, with industrial
robot maker Fanuc Corp down 0.9 percent, Honda Motor Co
off 1.2 percent and Toyota Motor Corp losing 2
percent.
"The possibility of QE3 is getting higher. However, if the
QE3 were to (be announced) ... all the good news has been
discounted," said Yasuo Sakuma, portfolio manager at Bayview
Asset Management.
Investors have had high hopes that the Fed will announce
another round of stimulus after it concludes a two-day meeting
on Thursday.
"If the QE3 were to be introduced, the pressure of a
stronger yen will not be necessarily good news for the Japanese
stock market," Sakuma said, adding that he had increased his
positions slightly in cyclical stocks such as financials and
capital goods, as well as his cash holdings.
Germany's constitutional court holds the fate of the euro in
its hands when it rules on Wednesday whether the European
Stability Mechanism (ESM) can go ahead, after already holding it
up for several months.
Technology stocks extended their losses after Intel Corp
cut its third-quarter revenue estimate more than
expected on Friday due to declining demand for its chips, as
customers lowered inventories and businesses buy fewer personal
computers.
Shinko Electric Industries, Ibiden Co Ltd,
Tokyo Electron Ltd and Renesas Electronics Corp
were down between 1 and 1.3 percent.
Japan Tobacco Inc rebounded 1 percent after
slumping 8.4 percent in the previous two sessions on concerns
over more regulation in Europe, after the French government said
it was looking at raising tobacco prices as part of a push
against smoking.
The broader Topix index lost 0.9 percent to 730.39.
The Nikkei is up 4 percent so far this year.
Barclays Securities said global equity prices were expensive
relative to the real economy.
"A comparison of year-on-year growth suggests that the
Nikkei average and S&P 500 are 10 percent and 20 percent
rich, respectively, relative to Japanese and U.S. manufacturing
indexes," it said in a note.
"Assuming this discounts additional monetary easing in the
U.S. and Europe, and progress on the euro zone debt situation,
we see a good chance of a significant correction in share prices
within the next three months."
Barclays Securities said any rise in Japanese government
bond yields would be short-lived. Yields on benchmark 10-year
JGBs were quoted at 0.800 percent on Tuesday.