TOKYO Japan's Nikkei average inched down on Friday as investors were cautious ahead of this Sunday's general election, with strong expectations that the main opposition party, which favors aggressive easing, is set for victory.
The Nikkei .N225 ended 0.1 percent lower at 9,737.56, but was still near its eight-month closing high hit on Thursday.
The benchmark remained in "overbought" territory, with its 14-day relative strength index at 75.7, way above the 70-level which defines as overbought and often indicates a possible pull back in the near-term.
Trading volume on the Nikkei surged to a nine-month high, with 2.47 billion shares changing hands partly due to settlement of December futures and options in a closely watch major "SQ" special quotation.
The Osaka Securities Exchange said after the close that Nikkei futures were settled at 9,720.36.
"What's expected to happen is that, come Monday, a lot of foreigners are going to let their positions go, so they can go skiing. People who know nothing will be saying this shows that it was just a short-term move and we can now ignore Japan," said Nicholas Smith, Japan strategist at CLSA.
"I wouldn't say to long investors that they should trade around what happens on Monday ... The medium- to long-term story looks really good at the moment," Smith said, adding that he expected the market to rise 15 to 20 percent next year.
A Reuters poll of 17 analysts expected the Nikkei to rise to 11,000 by the end of 2013, 13 percent above where it closed on Friday, as easy monetary policy weakens the yen and a resolution of U.S. fiscal problems lifts sentiment.
"The key positives for Japanese equities are that they are cheap, out of favor and have healthy balance sheets," said Robert Farago, head of asset allocation at Schroders Private Banking.
"The outlook for growth remains muted but no more so than in Europe or the UK, while earnings are forecast to grow this year and next. The economy appears stuck in second gear at a time when its near neighbors, notably china, are booming," he said. "However, the market is priced as if the country were heading backwards."
The Nikkei has surged 12.4 percent over the past month, spurred by a weaker yen after Shinzo Abe, the leader of the main opposition LDP, called for the Bank of Japan to adopt aggressive policy action, including embarking on "unlimited easing".
The yen fell to a near nine-month low of 83.96 yen to the dollar on Friday. A softer yen boosts exporters' overseas earnings when repatriated and increases their competitiveness, particularly against South Korean and Chinese rivals.
Some exporters succumbed to profit-taking, with Olympus Corp (7733.T), Hitachi Ltd (6501.T) and Nikon Corp (7731.T) down between 0.5 and 2.4 percent. But Canon Inc (7751.T) and Sony Corp (6758.T) rose between 0.3 and 2.3 percent.
Sharp Corp (6753.T) climbed 7.6 percent to extend this month's gain to 56.4 percent on short-covering after the struggling TV maker said in early December that U.S. chipmaker Qualcomm will invest $120 million in the Japanese firm. The stock is still down 60 percent year-to-date, however.
Short-selling interest in Sharp has fallen lately, although it still remains high, with 92.05 percent of its stock that is available to be borrowed out on loan as of December 12, down from 92.92 percent on December 7, according to data provider Markit.
The broader Topix .TOPX index added 0.2 percent to 801.04.
"After the election, we may see some correction as hopes for monetary easing will be priced in completely (if the Liberal Democratic Party wins a majority seat as expected)," said Naoki Fujiwara, a fund manager at Shinkin Asset Management.
"The Nikkei may hit 9,800 but we sill have concerns about the U.S. fiscal cliff and the health of the U.S. economy."
Investors were wary that a combination of U.S. government spending cuts and tax increases, due to take effect early next year, could tip the world's largest economy into recession.
The Nikkei is up 15.2 percent this year, ahead of a 12.9 percent gain in the U.S. S&P 500 .INX and a 14.3 percent rise in the pan-European STOXX Europe 600 .
(Additional reporting by Ayai Tomisawa; Editing by Sanjeev Miglani)