Nikkei steps back from 3-week high, Fed speculation frays nerves

By Ayai Tomisawa

TOKYO (Reuters) - Japanese stocks stepped back from a three-week high on Wednesday morning as concerns about an imminent turn in U.S. monetary policy dented risk appetite, while Sumitomo Mitsui Financial Group outperformed after raising its earnings forecast.

The Nikkei dropped 0.5 percent to 14,520.11 in mid-morning trade after moving in and out of positive territory earlier. The index jumped 2.2 percent on the previous day, posting the biggest rise in two months.

The Topix shed 0.2 percent to 1,203.25.

"I think the majority of investors still expect that the Fed will start tapering its stimulus in March. But there are views that it may start earlier than that," said Takuya Takahashi, a market analyst at Daiwa Securities.

The speculation over when the Federal Reserve may start winding down its $85 billion-a-month bond-buying programme remains a key driver of the market, and Friday's data showing an unexpected surge in U.S. jobs growth in October prompted markets to speculate of a possible December start to stimulus-tapering.

Atlanta Fed President Dennis Lockhart told reporters on Tuesday that a reduction of the central bank's quantitative easing program remains a possibility at the Federal Open Market Committee's next policy meeting on December 17-18, although he did say policy should remain very easy.

"Until there are more cues, investors may refrain from taking large positions," said Jun Yunoki, a strategist at Nomura Securities.

SMFG outperformed, rising 1.5 percent and was the most traded stock by turnover after raising its net profit outlook for the year through March by 5.5 percent to 750 billion yen. The figure was better than the 688.3 billion yen estimated by 18 analysts polled by Thomson Reuters Starmine.

Most exporters lost ground despite a weaker yen as investors locked in profits from the previous session's rises. Toyota Motor Corp dropped 0.3 percent, Honda Motor Co fell 0.9 percent and Advantest Corp shed 0.6 percent.

The dollar held at 99.63 yen, near a two-month high of 99.80 yen hit on Tuesday, having risen 0.6 percent so far this week.

Bucking the trend, Sony Corp soared as much as 4.4 percent to a two-week high of 1,775 yen after activist investor Daniel Loeb, founder of hedge fund Third Point LLC, told a CNBC interview that he was bullish on the Japanese economy. He added that the hedge fund's investment in Sony had also been a bet on growth policies being pursued by the Japanese government.

Third Point held a 1.64 percent direct interest in Sony shares as of the end of September.

Other notable movers included Pioneer Corp, which soared 13 percent on strong earnings, and Taiheiyo Cement Corp, which gained 3.0 percent after raising its earnings forecast and dividend outlook for the year ending March.

The Nikkei is up 40 percent so far this year, spurred by the Japanese government's aggressive fiscal and monetary stimulus policies.

(Editing by Shri Navaratnam)