Japan's Nikkei share average edged lower on Thursday, with traders saying they believed a one-month rally that had taken the benchmark to a 2-month high and close to resistance at its 75-day moving average was running out of steam. The Nikkei has risen almost 10 percent over the past month, with an extra boost coming from last Friday's EU decision to help the region's banking sector.
That and expectations for the European Central Bank to cut rates later in the day have underpinned risk appetite, although some analysts believe an ECB rate cut could be a double-edged sword for Japanese exporters and the Nikkei. "The ECB is likely to cut rates today - but if that leads to a fall in the euro against the yen, that would not be good for Japanese stocks," said Yutaka Miura, senior technical analyst at Mizuho Securities.
In light trade, the Nikkei fell 0.3 percent to 9,079.80, coming off a two-month closing high marked on Wednesday and retreating ahead of its 75-day moving average of 9,158. Analysts worry that Japanese exporters' profits could be squeezed if the euro falls further against the yen. The euro hit an 11-1/2-year low of 95.59 yen last month and now trades around 99.8 yen.
Investors are also expecting soft US jobs data at the weekend, which would fan fears of slowing growth in the world's biggest economy. Some analysts said the Nikkei was set to peak out as soon as next week, adding that there is little hope in the near-term that it will reach its March peak of 10,255.
"I feel this short-covering rally will have run its course soon... In the past year, we've seen a repeated pattern where markets rally on European policymakers' rough agreement and then fall again as they find out disagreement over details," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley. The broader Topix index dropped 0.3 percent to 776.37 in relatively light trade, at just 75 percent of its 90-day average volume.
Reconstruction-linked stocks were in favour, with construction machinery maker Komatsu Ltd rising 3.5 percent while Daiki Ataka Engineering Co Ltd, a company that has developed technology to decontaminate radioactive ash, soared 23 percent. Nikon rose 1.4 percent to 2,539 yen, hitting a four-year high of 2,559 yen at one stage, after Daiwa Securities raised its rating to 'outperform' from 'neutral', citing strong growth in SLR digital camera sales. Separately, Japan's business daily Nikkei also reported that the company's camera business was likely to see its annual operating profit increase 48 percent in the year to March.