Nikkei drops more than 2 pct as profit-taking hits large caps

Sun Jan 5, 2014 9:03pm EST

* 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.