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TOKYO (Reuters) - Japan's Nikkei average hit a one-week closing low on Wednesday as exporters fell on their perceived loss of profitability from a rising yen, with investors also disappointed at an apparent lack of progress in the U.S. fiscal standoff.
Exporters, notable gainers over the past two weeks, lost ground on profit-taking after the dollar dropped below 82 yen, with Toyota Motor Corp (7203.T), Honda Motor Co (7267.T) and Canon Inc (7751.T) down between 1.6 and 3.1 percent.
Comments by U.S. Senate Majority Leader Harry Reid on Tuesday over the lack of progress among Democratic and Republican lawmakers to reach a deal to avoid a year-end 'fiscal cliff' fanned investors' concerns.
"Buying may have peaked out, as there is a combination of reasons to pull back," said Toshihiko Matsuno, a senior strategist at SMBC Friend Securities.
"While looming concern about U.S. fiscal problems has been on the back of people's minds, there is a sense of caution on the BOJ's stance on monetary policy."
The Nikkei .N225 dropped 1.2 percent at 9,308.35, breaching a support level of 5-day moving average at 9,341.98.
The Nikkei has rallied 7.5 percent over the past two weeks, as the yen has weakened sharply on expectations main opposition leader Shinzo Abe will win a December 16 election and increase pressure on the central bank to reverse the country's persistent deflation.
Abe has pressed the Bank of Japan to take more extreme monetary easing steps, weakening the yen to a 7-1/2-month low of 82.84 against the greenback on November 22. The Japanese currency was quoted at 81.89 yen to the dollar on Wednesday.
Traders said that while some of his calls for easy monetary policy seem possible, his demands are getting bolder and such demands as foreign bond buying and an inflation target of 2 percent are unrealistic.
"The Abe trade is probably over," a dealer at a foreign bank said. "The yen was triggering a lot of buying. People shifted out of domestic into FX-sensitive names. That trade is almost over as the FX is stalling at around 82 (yen to the dollar)."
Japan voters preference: link.reuters.com/xyc34t
BOJ and inflation targets: link.reuters.com/rec34t
Asset performance in 2012: link.reuters.com/muc46s
The trader said investors were facing a dilemma whether to chase the market higher or move back into defensive stocks, which are less affected by slowing global growth.
He nominated medical equipment maker Nihon Kohden Corp (6849.T), up 0.5 percent, as one firm with defensive qualities as well as robust growth potential.
While short-term corrections are possible, some analysts see a further rise before the end of the year.
The Nikkei is up 10.1 percent this year, trailing an 11.2 percent rise in the U.S. S&P 500 .INX and an 11.6 percent gain in the pan-European STOXX Europe 600 index.
"The current situation is based on expectations that Japan may change under the next government," said Hisao Matsuura, equity strategist at Nomura Securities, noting that the market is still subject to short-term fluctuations.
"We can expect a steady rise after (the election)," he said, adding that Nomura had a year-end Nikkei target of 9,500, 2.1 percent above Wednesday's closing levels.
Notable gainers included social gaming company DeNA Co Ltd (2432.T), a widely-held stock, which climbed 0.7 percent after Morgan Stanley MUFG lifted its price target, citing strong overseas growth potential.
The brokerage, however, cut the price target of DeNA rival, Gree Inc (3632.T). The stock dropped 3.2 percent.
The broader Topix .TOPX fell 1.3 percent to 771.39 in relatively light trade, with 1.73 billion shares changing hands, down from Tuesday's 1.99 billion and last week's average of 1.95 billion.
In terms of valuations, Japanese stocks carry a 12-month forward price-to-earnings of 12, slightly cheaper than the S&P 500's 12.5 but more expensive than the STOXX Europe 600's 11, data from Thomson Reuters Datastream showed.