Nikkei drops on profit taking to await outcome of BOJ meeting

People look at a stock quotation board outside a brokerage in a business district in Tokyo December 19, 2012.

TOKYO (Reuters) - The Nikkei share average fell on Monday as investors pocketed profits as a precaution ahead of the outcome of the Bank of Japan's two-day policy meeting, with expectations for aggressive easing already mostly priced into the market.

The Nikkei fell 0.9 percent to 10,820.59 by the midday break, moving further away from a 32-month high of 10,952.31 hit last Tuesday.

Analysts said that investors have priced in news that the central bank will set a 2 percent inflation target and approve further asset buying, while a rise in the yen triggered profit taking in exporters.

Japan's government and central bank have agreed to set 2 percent inflation as a new target this week, when the Bank of Japan will also consider making an open-ended commitment to buy assets until the target is in sight, sources familiar with the BOJ's thinking told Reuters.

"Investors seem to trust that the government is committed to getting the country out of deflation... and they believe that there will be further easing even after tomorrow," said Shun Maruyama, chief strategist at BNP Paribas, who set the year end Nikkei target at 15,000. "So even though they took profits from the recent gains, they will likely buy on the dips sooner or later."

Maruyama also said that investors did not want to take large positions on Monday as the U.S. markets are closed for the Martin Luther King Jr. holiday.

RISE IN YEN PULLS DOWN EXPORTERS

Exporters such as automakers have seen their share prices shoot up over the past two months, driving the Nikkei's rally, as a weaker yen promises higher overseas revenue when repatriated, making them more competitive against foreign firms.

Toyota Motor Corp's (7203.T) share price, for example, has risen 39 percent in the two months. Eiji Kinouchi, chief technical analyst at Daiwa Securities, recommends buying automaker shares on the dip if the market falls after the BOJ meeting, as well as those of banks and real estate.

On Monday, the yen rose to 89.70 yen to the dollar, 0.5 percent above its late U.S. levels last week, dragging down such exporters as Toshiba Corp (6502.T), Nissan Motor Co (7201.T) and Nikon Corp (7731.T) which dropped between 1.1-1.5 percent.

The Nikkei has added 24 percent since mid-November when then-incoming leader Shinzo Abe began calling for further policy easing, causing the yen to weaken.

Traders said that retreat on Monday was unsurprising following such a steep rise.

The broader Topix dropped 0.7 percent to 905.16 with 3.3 billion shares changing hands, slightly down from last week's average daily volume of 3.73 billion shares.

FINANCIALS WEAK

Traders said that such high beta shares in the insurance and financial and financial sectors were also vulnerable to profit-taking in a weak market. The insurance sector dropped 2.2 percent, the biggest sectoral loser on Monday.

T&D Holdings Inc (8795.T) shed 1.7 percent, while Dai-ichi Life Insurance Co (8750.T) slid 3.0 percent.

Bank shares were also weak, with Mitsubishi UFJ Financial Group (8306.T) dropped 2.3 percent and Mizuho Financial Group fell 1.7 percent.

Meanwhile, Sharp Corp (6753.T) dropped 3.8 percent after two sources told Reuters that the company has nearly halted production of 9.7-inch screens for Apple Inc's (AAPL.O) iPad, possibly as demand shifts to its smaller iPad mini.

(Additional reporting by Sophie Knight; Editing by Chris Gallagher and Simon Cameron-Moore)