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TOKYO (Reuters) - Japan's Nikkei index eased from a one-year high on Wednesday as a majority of the companies in the index went ex-dividend. But participants said the benchmark was supported by strong interest from foreign buyers and domestic reinvestment of dividends.
The benchmark Nikkei .N225 ended off 72.58 points, or 0.7 percent, at 10,182.57, as dealers said 195 out of 225 companies passed the deadline for purchasers of stock to get rights to dividends for the business year to March 31. Dealers had expected the ex-dividend impact to take 86 points off the benchmark.
Mizuho Financial Group (8411.T) and Takeda Pharmaceutical Co Ltd (4502.T) both fell 3.5 percent and topped the Topix core 30 list .TOPXC as the biggest percentage losers as they carry the highest dividend yields among Nikkei companies, Thomson Reuters Datastream showed.
Still, market participants expected domestic passive funds to continue reinvesting their dividends this week, which would provide support.
"(Passive funds)can reinvest up to the end of the 30th, so I don't think they're in a rush to do it now," said Hiroyuki Fukunaga, CEO of Investrust.
Wednesday's fall took the Nikkei's 14-day relative strength index to 68.7, after holding above 70, or 'overbought' territory, for most of March and February.
The Nikkei is still up 20.4 percent since January, buoyed by a run of strong U.S. economic data and accommodative monetary policies by central banks across the globe.
The broader Topix .TOPX index dropped 0.9 percent, or 7.99 points, to 864.43, after traders expected the ex-dividend effect to shave about 8.4 points off the index.
Kenichi Hirano, operating officer at Tachibana Securities said the market's ability to limit the ex-dividend impact reflected the bullish investor sentiment.
"Global funds that passed on Japanese stocks and avoided it previously are now buying to increase their allocation ... This and excess liquidity are driving Japan buying. So if these conditions change or not is the focus....Fundamentals don't matter," said Hirano.
A senior dealer at a foreign bank said foreign buying for 12 consecutive weeks showed the market's upward trend was still in place.
"The market is down because of ex-div ... We are still seeing better interest in buying auto stocks," he said.
The Topix's transport equipment subindex .ITEQP.T, home to Toyota, is among sectors that have seen a sharp improvement in the earnings outlook.
The earnings momentum - analysts' earnings upgrades minus downgrades as a percentage of total estimates - for the sector rose to 19 percent from flat in February, according to Thomson Reuters I/B/E/S. That compares with earnings momentum of 3.6 percent for the Topix.
Trading volume on the main board slipped, with 1.96 billion shares changing hands on the main board, down from 2.27 billion shares on Tuesday.
Japanese equity dividend yield vs JGB yield:
Equity risk premium: link.reuters.com/mum95s
Sharp (6753.T) remained untraded with a glut of buy orders until the close after it said it will issue shares worth $808 million to Taiwan's Hon Hai Precision Industry (2317.TW) as part of a tie-up in liquid crystal display production.
The stock ended up 15.2 percent to 570 yen.
Makoto Kikuchi, CEO of Myojo Asset Management Japan, said the stock was bought in short-covering by investors who had expected equity financing and dilution of shares.
"The news has short-term positive impact because it removes the possibility of an immediate large scale equity financing... Stock-wise, the shares have already pretty much met their upside potential...unless of course there's a short-squeeze that pushes the stock up even further," said Kikuchi.
Sony Corp (6758.T) gained 1.8 percent after its CEO Kazuo Hirai signaled his determination to turn around the group's ailing TV business by remaining directly in charge of the division, as the Japanese brand fights to regain ground against rivals such as Apple (AAPL.O).
Within the electronic machinery sector, Pioneer Corp (6773.T) jumped 5 percent to 419 yen after JPMorgan raised the stock's price target to 570 yen from 540, citing expectations for a sharp recovery in the car electronics business in the first half of 2012. It kept an "overweight" rating on the stock.
Additional reporting by Dominic Lau, Editing by Jonathan Thatcher