The Nikkei share average ended down 0.28 percent after hitting its highest in more than six years on Thursday as investors grabbed profits in Honda Motor Co Ltd and other recent gainers following a rise in the yen.
Bucking the trend was Chugai Pharmaceutical Co, which rose on positive drug-trial results, and Ricoh Co after a report it would buy IBM's digital commercial printer operations for about $700 million. The Nikkei lost 49.10 points to 17,458.30, having earlier hit 17,617.64, its highest since July 2000. The broader TOPIX was down 0.53 percent at 1,729.40.
While some bet that the Nikkei is ready to roll higher on views that corporate earnings forecasts will be lifted thanks to the soft yen and stable oil prices, others remain cautious. "Japan has lagged. It was a significant underperformer against the rest of Asia last year. Secondly, there is a little bit of focus this year on a global industrial cyclical pickup," said Garry Evans, a strategist at HSBC Securities.
Data released by the Tokyo Stock Exchange showed that foreign investors have so far bought a net 557.5 billion yen ($4.62 billion) of Japanese stocks this year. Their total net buying amounted to 5.5 trillion yen in 2006, about half that of 2005 when their net purchase hit a record. But he doubts the upside potential.
"The fact that it is by no means a cheap market is a risk. Investors looking to take a cyclical view probably prefer markets like Korea and Taiwan, which are equally cyclical but much cheaper." Japan's broader TOPIX index trades at a PE of 19 while Korea KOSPI is at 10 and Taiwan's TAIEX at 14.
Still, Credit Suisse analyst Shinichi Ichikawa said 2007 will be a 'good year' for the Tokyo stock market while 2006 was an 'off year'. "The Nikkei has been rising since late last year on expectations for good corporate earnings in the second half of the 2006/07 year," he said. Analysts' consensus is for about 10 percent growth in recurring profits for the fiscal year ending March and further growth in the year starting April, he noted.
Ichikawa also recommended that investors move away from defensive stocks - which include food companies and drug makers - and toward stocks driven by the global or domestic economies.
In fact, this year's worst performer so far has been the pharmaceutical sector IPHAM, dropping 3.4 percent. The drug stocks booked one of the best performances on the TOPIX last year, gaining 24 percent. Among the losers, Rubber Products has fallen 2 percent and Mining has dipped 1.4 percent.
Chugai Pharmaceutical jumped 6.5 percent to 2,715 yen after the drug maker and its partner, Roche Holding AG, said the rheumatoid arthritis drug Actemra met its main goal in a recent study. Roche expects to file a new drug application for Actemra in the United States and Europe in late 2007.
Ricoh, which makes office equipment, surged 5.2 percent to 2,540 yen after the Nikkei business daily said it would buy IBM's digital commercial printer operations in April, which would make the Japanese firm the No 1 player in that growing market.
Yahoo Japan Corp climbed 1.1 percent after posting strong quarterly earnings. Retail investors, who have turned cold on the stock market after a series of accounting scandals at start-up firms including once high-flying Internet firm Livedoor Co, prompted selling in many small-cap stocks.
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