TOKYO Japan's Nikkei share average sank into bear territory on Friday before recouping some of its losses on expectations that the country's $1 trillion public pension fund would ramp up its buying of equities.
After the markets closed, the Government Pension Investment Fund (GPIF) said that it would lift its weighting in foreign and domestic stocks while cutting back its target allocation for Japanese government bond.
The Nikkei .N225 ended 0.2 percent lower at 12,877.53 points on Friday, recovering from an earlier low of 12,548.20, which marked a 21 percent slide from a 5-1/2 year peak hit on May 23, leaving the index in bear market territory.
Ahead of the announcement from the pension fund, the yen trimmed gains against the dollar while the benchmark 10-year Japanese government bonds reversed a rise.
"A lot of people are speculating on that," a dealer at a foreign bank said, referring to the announcement of the GPIF briefing in the afternoon.
"If you look at the sectors that are outperforming since the (briefing) announcement, the banks are doing the best," he said, adding that if the GPIF were to buy more stocks, banks were likely to benefit as they have significant weighting in the broader Topix .TOPX index.
The banking sector .IBNKS.T pared a steep loss to end 0.5 percent lower.
Japanese equities have tumbled over the past two weeks, with trading characterized by violent price moves, as investors were spooked by worries over slowing growth in China, and uncertainty over whether the U.S. Federal Reserve would roll back its stimulus this year.
Investors have also been disappointed with Prime Minister Shinzo Abe's growth strategy this week to revive the world's third-largest economy.
The sell-off has wiped off about $500 billion in market capitalization from the Nikkei, based on the benchmark's May 22 close.
"Recent weakness in the market represents a little bit of a disappointment for 'Abenomics'," said Kenji Shiomura, an analyst at Daiwa Securities.
"But it would be too extreme to say that hopes for Abenomics have faded completely because the biggest impact Abenomics gave the market was monetary easing, and it is still continuing," he said.
"We will need to see the outcome of the U.S. jobs data (later on Friday), but now that most of bad domestic factors are out, the timing to buy back Japanese stocks is nearing."
The yen cut its gain against the dollar after advancing 1.9 percent overnight, marking its biggest one-day percentage rise in three years as investors cut back their bullish bets on the greenback on concerns that the U.S. jobs report will disappoint. It was last traded at 96.565 to the U.S. currency.
The yen had fallen nearly 30 percent against the dollar to a 4-1/2 year low of 103.74 on May 22 since mid-November, when Abe promised expansionary fiscal and monetary policies to lift the economy out of doldrums.
The yen's sharp decline and optimism over Abe's reflationary policies had fuelled an 80 percent rally in the Nikkei since late last year, leaving it vulnerable to profit-taking.
YEN STRENGTH WEIGHS
Although the yen trimmed gains, currency-sensitive exporters still ended the day lower, with Toyota Motor Corp (7203.T), Honda Motor Co (7267.T), Toshiba Corp (6502.T) and Panasonic Corp (6752.T) off between 2.8 and 3.9 percent.
Tetsuro Ii, the chief executive of Commons Asset Management, said he was bullish on Japanese equities because company fundamentals were improving on the back of soft yen.
"The recent rise in the yen is not that startling given what companies are expecting this year," he said, adding that most exporters have based their foreign exchange assumptions at 90 to 95 yen to the dollar for the financial year ending March 2014.
Despite the recent rout, the Nikkei is still up 4 percent since the Bank of Japan's announcement of its radical monetary expansion campaign on April 4 and has risen 24 percent so far this year.
The broader Topix .TOPX index lost 1.3 percent to 1,056.95 on Friday, with volume 10 percent above its full daily average for the past 90 trading days.
The Mothers .MTHRS index, comprised of small to mid-sized firms which retail investors tend to focus, slumped 11.5 percent. It has lost 38 percent since hitting a six-year high on May 8, but is still up 66 percent so far this year.
TEN-YEAR JGB YIELDS RISE
Benchmark 10-year JGBs reversed gains, with the yield up 2.5 basis point to 0.860 percent after hitting a one-week low of 0.80 percent.
Ten-year JGB futures closed 0.09 point higher at 143.11 after hitting a four-week high of 143.52.
"The Nikkei seems to be vulnerable ... but apart from that we need to carefully assess the U.S. economic status," said Maki Shimizu, senior JGB strategist at Citigroup in Tokyo.
"Over the long-term, the Fed policy and U.S. Treasury yields will have bigger impact on the markets in terms of setting the direction."
(Editing by Sanjeev Miglani)