September 20, 2017 / 2:38 AM / a year ago

Nikkei flat after sharp rally; investors await Fed

* Snap election hope should support Japan stocks for a while - analyst

* Market watches U.S. yields after Fed

By Ayai Tomisawa

TOKYO, Sept 20 (Reuters) - Japan’s Nikkei share average was nearly flat on Wednesday morning after scaling more than two-year highs on the previous day, while investors stayed cautious before the U.S. Federal Reserve’s policy meeting which ends later in the day.

The Nikkei was flat at 20,302.96 in midmorning trade, after surging 2.0 percent to hit the highest level since August 2015 on Tuesday supported by a weaker yen and hopes for a snap election.

Traders said that investors stayed on the sidelines as they awaited signals from the Fed on when it will hike rates again and start shrinking its balance sheet.

The U.S. central bank is expected to announce when it will begin paring its bond holdings, and while a September interest rate increase is not expected, investors will closely study Fed Chair Janet Yellen’s views on inflation for clues to whether the Fed will raise rates in December.

“If the Fed hints at a rate hike in December, the Nikkei will likely rise further helped by the dollar’s rise against the yen. Whether the U.S. yields will rise or not is also in focus,” said Masayuki Kubota, chief strategist at Rakuten Securities.

He said that since Japanese stocks tend to move in line with U.S. yields, and if they rise, Japanese financial companies, which invest in high-yielding products such as foreign bonds, will likely gain.

Traders also said that the Japanese market should be supported by expectations for a snap election, which is expected to be held on Oct. 22.

Sources said on Tuesday that pledges to spend on education and child care, stay tough on North Korea and revise the pacifist constitution were likely to be pillars of Japanese Prime Minister Shinzo Abe’s campaign if a snap election were called next month.

Financial stocks and exporters were mixed after sharp rallies on the previous day. Mitsubishi UFJ Financial Group shed 0.2 percent, T&D Holdings edged up 0.1 percent and Dai-ichi Life Holdings advanced 1.7 percent.

Mining and oil stocks outperformed, with Inpex Corp rising 3.0 percent, Japan Petroleum Exploration Co gaining 1.2 percent and Idemitsu Kosan added 0.8 percent.

Sony Corp declined 1.5 percent after Credit Suisse cut its rating to ‘neutral’ from ‘outperform,’ citing slow growth in its gaming business over the next few years.

The broader Topix added 0.1 percent to 1,668.96.

Reporting by Ayai Tomisawa; Editing by Eric Meijer

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