Japanese shares will probably move in a narrow range in a week shortened by public holidays, but could dip below the 11,000 level as earnings disappointment saps Wall Street's momentum and as concern lingers over the global economic outlook.
Tokyo financial markets will be closed on Monday and Thursday for national holidays, and there are few scheduled economic events at home to give direction.
"As we have two holidays and considering things like geopolitical risks and the performance in overseas markets, investors are not expected to do much," said Kazuhiro Takahashi, equities general manager at Daiwa Securities SMBC.
The Nikkei average ended last week at 11,082.49, almost flat from a week earlier and near its 25-day moving average, which has been a technical support in the past weeks.
Friday's close was its lowest since September 3, but was still 3.7 percent above its August trough of 10,687 in the aftermath of surprising weakness in preliminary April-June GDP data.
Some traders said they expected the Nikkei to test 11,000 this week, as sentiment is turning negative given recent domestic data showing signs of a slowdown in some key areas, including exports and industrial output, and given growing concerns about the strength of the global economy in 2005.
While trading is expected to be sluggish with many domestic institutional investors taking to the sidelines ahead of the end-September interim book closings, selling could be triggered if Wall Street reverses recent gains after a Federal Open Market Committee (FOMC) meeting, analysts said.
The US market is set for the Federal Reserve to raise interest rates by 25 basis points to 1.75 percent on Tuesday.
Analysts said investors will be looking beyond the third rate rise of the year for reassuring signals that the US economy is on a recovery path - especially jobs, and could react negatively if they don't like what they hear.
Signs of a slowdown in the global economy could also prompt a shift in investor focus to bonds from stocks.
Possibly reflecting such a change, foreigners' net purchases of Japanese bonds hit a monthly record of over 2 trillion yen ($18.24 billion) in August. They bought a net 469.8 billion yen worth of Japanese shares in the same month.
Analysts said pension funds and other long-term investors are hesitant to buy blue chips here before top companies start reporting first-half earnings in October.
Bank shares may come under scrutiny as investors look for those who might benefit after news late last week that Citigroup Inc had been effectively forced out of the lucrative private banking business in Japan.
Bank regulator, the Financial Services Agency, ordered the private banking unit of Citigroup to close one branch and three satellite offices after uncovering a series of problems, including a failure to prevent suspected money laundering.
A Tuesday meeting between Prime Minister Junichiro Koizumi and US President George W. Bush is expected to centre on national security issues, not economic issues, analysts said, and is unlikely to be a factor in the market.
Koizumi returns on Thursday from an 11-day tour of the United States, Mexico and Brazil and starts preparing for a cabinet reshuffle expected in the following week.