* Foreign buying seen likely to continue through year-end
* Volume tops 2 billion for 3rd straight day
* Nikkei flat as market overheated after rally
* Softer yen supports underlying sentiment
By Antoni Slodkowski and Ayai Tomisawa
TOKYO, Dec 16 (Reuters) - Japan's Nikkei average traded flat
for a fourth straight session on Thursday as optimism over the
dollar's rise to a near three-month high against the yen the
previous day was offset by worries over euro zone debt and
overheating in the market.
The Nikkei has been trapped in a narrow 190 point range for
over a week as domestic investors aggressively took profits on
its rally of around 12 percent since the beginning of November,
while foreign investors continued buying financial shares seen as
undervalued.
Trading was active, with volume solid for a third straight
day. Over two billion shares changed hands on the Tokyo Stock
Exchange's first section. Advancing issues outnumbered declining
ones by 805 to 690.
Foreign securities houses, which place blocks of orders ahead
of the Tokyo opening, made net sell orders on Thursday after
making net buy orders for 13 straight days.
Japanese investors sold a net 309.1 billion yen ($3.67
billion) in foreign bonds during the week to Dec. 11, according
to Finance Ministry data. That compares with net sales of 760.8
billion yen a week earlier. See [JP/CAP].
However, traders say even though profit-taking may cause the
market to lose steam temporarily, it does not suggest a downtrend
for Japanese equities.
"Recent selling in bonds is suggesting a shift to the
equities market from bonds," said Mattia Ciancaleoni, director of
equity sales at Citigroup Global Markets Japan.
He said the Japanese market, which has been underperforming
overseas markets, will likely gain further towards the year-end.
"There is a sign of recovery in the market, so I don't think
investors want to take huge vacations to miss more positive signs
like that in the next few weeks," Ciancaleoni said.
Japanese government bonds slipped on Thursday, taking their
cue from a continuing slide in U.S. Treasuries, with a
liquidity-enhancing auction eyed as a chance to gauge investor
demand after this week's sharp sell-off. [JP/]
The benchmark Nikkei .N225 added 1.51 points or 0.01
percent to close at 10,311.29 while the broader Topix index
.TOPX gained 1.42 points or 0.2 percent to 903.84.
Japanese shares, which are down some 2.2 percent in the year
to date and have underperformed globally, stayed flat as
investors' appetite for risky assets lessened, with worries about
euro zone bonds resurfacing after Moody's warned it may downgrade
Spain's debt.[ID:nLDE6BE0B8]
"The Nikkei is taking a breather after a six-week rally, but
sentiment remains bullish overall," said Takashi Ohba, a senior
strategist at Okasan Securities.
Ohba said that while major global cyclical stocks, which are
seen as overbought, are edging lower, retail investors continue
picking up low-priced smaller stocks, boosting volume and adding
to the underlying positive mood.
"If the dollar gains a little bit more against the yen and
goes above 85 yen it could trigger the Nikkei's move above the
current tight range," said Ohba.
A softer yen supports exporters in the long run, as many of
them based their earnings estimates for the October-March second
half on an assumed dollar/yen rate of around 80-83 yen.
If retail investors start trading a bit more aggressively and
boost volume, the Nikkei may pierce strong technical resistance
at 10,420.74, the level where futures and options contracts
expiring in December settled on Friday, traders said.
E-commerce business operator Dena 2432.T surged 9.9 percent
to 2,975 yen after it said it would offer its flagship social
gaming platform on Samsung Electronics Co Ltd's 005930.KS
handsets worldwide.
Aozora Bank Ltd 8304.T surged 7.8 percent after Goldman
Sachs started coverage of the bank at "buy" and a target price of
190 yen. The brokerage said the stock is cheap, with its
price-to-book ratio around 0.52 for the financial year ending
next March compared with the banking sector's average PBR of
0.73.
Other banks extended gains in heavy trade as foreign funds
continued adding underweight financial stocks to their
portfolios.
Meanwhile, Nomura Securities said in a recent report that
when the JGB yield curve steepens it recommends overweighting
such sectors as financials and real estate.
Mitsubishi UFJ Financial Group 8306.T gained 1.4 percent to
435 yen, while Sumitomo Mitsui Financial Group 8316.T added 2.2
percent to 2,856 yen.
In contrast, Otsuka Holdings 4578.T lost 6.6 percent to
1,999 yen, well below its initial price of 2,100 yen in its debut
on Wednesday as investors worry over the company's heavy reliance
on Abilify, a schizophrenia drug due to lose patent protection in
2015.
(Editing by Michael Watson)