Nikkei drops more than 2 pct as profit-taking hits large caps
* Large caps, exporters lead declines * Nikkei may head towards 17,000 in Jan-March - BoFA Merrill * JPX-Nikkei 400 Index starts trading By Ayai Tomisawa TOKYO, Jan 6 (Reuters) - Japan's Nikkei share average slid to a 1-1/2-week low on its first trading day of 2014, snapping a nine-day winning streak, as investors took profits on financials and large market cap stocks such as Fast Retailing and SoftBank. The Nikkei dropped 2.6 percent to 15,872.86 in mid-morning trade after falling to as low as 15,864.44, its lowest level since Dec. 25. The Topix dropped 1.2 percent to 1,286.96. Futures and large cap stocks led the declines, with Fast Retailing Co tumbling 4.0 percent, SoftBank Corp shedding 2.3 percent and KDDI Corp sliding 2.5 percent. Financials were also weaker, with Mitsubishi UFJ Financial Group, which was the third most traded stock by turnover, fell 1.7 percent. On Dec. 30, the index closed at a six-year high with a 57 percent annual gain, its biggest in more than 40 years on the back of aggressive economic stimulus by Prime Minister Shinzo Abe. Analysts said the Japanese market, which rose for a ninth day on Friday to post its longest winning streak since July 2009, may see profit-taking for a few days as investors turn cautious after steep gains. But they also said that Japanese shares are among foreign investors' favourites due largely to a weak yen, which lifts exporters' competitiveness abroad and their profits when repatriated. "The Japanese market will likely continue attracting buying from overseas this year," said Naoki Kamiyama, head of Japan equity strategy at Bank Of America Merrill Lynch. "Bright U.S. economic indicators and stronger dollar-yen levels may lift the Nikkei to 17,000 in the Jan-March period." Kamiyama said that Friday's U.S. jobs data will give further clues as to how well the U.S. economy is recovering and how fast the Federal Reserve will end its stimulus programme. Federal Reserve Chairman Ben Bernanke, who will step down at the end of this month, heightened market expectations that the U.S. central bank will continue to scale back its bond purchases in 2014, although he tempered his rosy assessment by repeating that the overall recovery "remains incomplete." On Monday, the Tokyo Stock Exchange launched the JPX-Nikkei Index 400. It opened at 11,728.21, and was down 0.6 percent at 11,654.55 in mid-morning trade. The market expects that investors will track the new index, comprised of companies with high returns on equity and strong corporate governance, for their passive equity investments eventually. "It may not happen soon, but people are monitoring what a big fund, like GPIF (the Government Pension Investment Fund) will do," said Takuya Takahashi, an analyst at Daiwa Securities. Many traders in Tokyo returned from the New Year holiday to find that the yen slumped to a fresh five-year nadir of 105.45 yen against the dollar on Thursday, before retracing slightly. On Monday, the dollar was buying 104.89 yen, up about 0.1 percent on the day. Exporters lost ground, with Advantest Corp falling 3.7 percent, Toyota Motor Corp shedding 1.3 percent, and Canon Inc dropping 1.4 percent. Shippers also took a hit from the weak Baltic Dry Index , which dropped 3.6 percent. Kawasaki Kisen Kaisha dropped 2.6 percent and Mitsui OSK Lines shed 2.1 percent.