TOKYO Japan's Nikkei average fell on Friday as data showing U.S. manufacturing grew at its slowest pace in 11 months in June added to concerns about weaker growth in Europe and China, but the index was still headed for best weekly gain in four months.
Economic-sensitive sectors were the major decliners, with the mining sector .IMING.T down 2.4 percent and shippers .ISHIP.T losing 1.6 percent.
By the midday break, the Nikkei .N225 was down 0.5 percent at 8,776.98 points after hitting its highest closing level in five weeks on Thursday. But it was holding above 8,714.78, the 23.6 percent retracement of its fall from March 27 to six-month low on June 4.
"We are seeing Japanese banks benefiting from the fact they were excluded from the downgrades from Moody's. Some of the regional banks are outperforming on the back of that," a trader at a European brokerage said.
Ratings agency Moody's Investors Service overnight cut the credit ratings of 15 of the world's biggest banks, including JPMorgan (JPM.N), Bank of America (BAC.N) and HSBC Holdings (HSBA.L), to reflect the risk they face from volatile capital markets activities.
Japanese regional banks Towa bank (8558.T), Oita Bank (8392.T), Akita Bank (8343.T) and Ehime Bank (8541.T) were up between 0.4 and 1.9 percent.
The benchmark Nikkei is still up 2.4 percent this week, on track for its best weekly performance since February, but is down 13.2 percent on the quarter, weighed by concerns about the deepening euro zone sovereign debt crisis.
The leaders of Germany, France, Italy and Spain will try to find common ground in Rome on Friday to restore confidence in the currency bloc ahead of a full EU summit next week.
"I don't see any immediate catalyst for upside from that. If there is a bit more conciliatory tone from Germany, for instance, on both Spain and Greece, then perhaps we will see a bit more upside," said Naomi Fink, Japan equity strategist at Jefferies.
The broader Topix .TOPX slipped 0.6 percent to 749.42 on Friday. Trading volume on the index after the morning session was light, at 37 percent of its full daily average for the past 90 days.
The Topix now carries a 12-month forward price-to-book ratio of 0.83, much cheaper than the U.S. S&P 500's .SPX 1.83 and STOXX Europe 600's 1.23, data from Thomson Reuters Datastream showed.
But the Japanese index offered a much lower return on equity of 7.7 percent to S&P 500's 15.4 percent and STOXX Europe 600's 12.9 percent.
Japanese exporters got psychological support from a weaker yen against the dollar. The yen's correlation with the Nikkei hit a near two-year high but the link was not as pronounced, with the 25-day rolling correlation between the Japanese currency and the benchmark rising to 0.605 on Thursday.
"The yen holding nicely above the 80 yen level is positive for exporters, certainly electronics names," the trader said.
Sony Corp (6758.T) rose 3.9 percent after two sources said it and Panasonic Corp (6752.T) will announce an agreement next week to cooperate in developing ways to mass produce next generation organic light emitting diode televisions. Panasonic added 1 percent.
Sony is also in final talks with Olympus Corp (7733.T) to invest 50 billion yen ($623 million) in the camera and medical equipment maker to help it rebuild from last year's accounting scandal, the Nikkei newspaper said. Olympus gained 1.7 percent.
Kansai Electric Power Co (9503.T) shed 3.7 percent, however, after Kyodo News reported that scheduled blackouts could hit twice a day in power-strapped Kansai region, while possibly taking place once a day in other areas. ($1 = 80.2750 Japanese yen)
(Additional reporting by Sophie Knight; Editing by Kim Coghill)