TOKYO (Reuters) - Japan's Nikkei share average fell on Thursday as weak China data further unsettled markets coming to grips with Federal Reserve Chairman Ben Bernanke's confirmation that the U.S. central bank could trim its bond-buying programme later this year.
The benchmark Nikkei ended 1.7 percent lower at 13,014.58 points, retreating from a one-week high of 13,245.22 hit on Wednesday. It dipped below the 13,000 mark several times during the session.
"The market's weakness shows that the Fed's decision to indicate exit strategy was too soon," said Masaru Hamasaki, senior strategist at Sumitomo Mitsui Asset Management.
Bernanke said on Wednesday the U.S. economy is expanding strongly enough for the Fed to begin slowing the pace of its $85 billion monthly purchases of Treasuries and mortgage-backed securities, with the goal of ending it in mid-2014.
Equity markets, which have been underpinned by the massive liquidity support from the Fed and other major central banks in recent years, were also left to ponder a further dose of bad news from China.
Data released earlier in the day showed China's factory activity dropped to a nine-month low in June as demand faltered, hurting manufacturers with exposure to Asia's biggest economy.
"Chinese markets, especially Hong Kong stocks, reacted sharply to today's flash PMI and this hurt market sentiment in Tokyo," said Yuya Tsuchida, a strategist at Toyo Securities.
"Some investors are waiting for the Nikkei to drop below the (psychologically important) 13,000 mark to buy shares on dips. That should support the market."
The Nikkei has lost 16.7 percent since hitting a 5-1/2 year peak on May 23 on concerns over Fed stimulus as well as slowing growth in China, Japan's second-largest export market, and disappointment over Prime Minister Shinzo Abe's recently unveiled growth strategy to revive the economy.
The broader Topix shed 1.3 percent to 1,091.81 in relatively subdued trade, with 2.86 billion shares changing hands, well below last week's daily average of 3.36 billion.
Real estate stocks were battered, with the sector subindex shedding 3.5 percent to become the worst performer on the main board.
GS Yuasa Corp (6674.T) bucked the trend and jumped 5.9 percent after the German industrial group Robert Bosch GmbH said it had agreed to work on next-generation lithium-ion batteries with the battery maker and Mitsubishi Corp (8058.T).
Traders said a weaker yen helped some currency-sensitive exporters to outperform the broader market. Mazda Motor Corp (7261.T) rose 2.2 percent and Fuji Heavy Industries Ltd (7270.T) added 1 percent, while Sony Corp (6758.T) eased 0.1 percent.
The yen fell 0.6 percent against the dollar to 97.04 yen on Thursday as the U.S. currency rose broadly after the Fed's policy meeting.
"As long as risk aversion does not intensify further, Japanese equity valuations could be seen as attractive," said Hiromichi Tamura, chief strategist at Nomura Securities
The Nikkei entered a bear market last week after dropping more than 20 percent from its May 23 multi-year high, but is still up 25 percent this year, underpinned by sweeping government and central bank stimulus steps.
Additional reporting by Ayai Tomisawa; Editing by Shri Navaratnam