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Nikkei seen firmer despite rates hike fears

TOKYO: Tokyo traders expect shares to start lower this week after US stocks fell last Friday on fears of a steep interest rate hike.

But they said expectations for higher liquidity with the start of new investment trusts should help the benchmark Nikkei average quickly back on its feet, possibly pushing it toward the psychologically key 20,000 level later in the week.

But such gains would also depend on how Wall Street copes with the Federal Open Market Committee (FOMC) decision on interest rates after its meeting on Tuesday and Wednesday , especially if it is more than the expected 25 basis point hike.

The Dow Jones Industrial average and the technology-driven Nasdaq composite Index both dipped on Friday after the U.S. announced stronger-than-expected economic data, which the market feared would persuade the Fed to raise rates by 50 basis points to head off inflationary pressure.

The Nasdaq fell 3.78 percent to 3,887.06 and the Dow Jones industrial average dropped 2.62 percent to 10,738.87.

"The Tokyo market will inevitably be swung around by the United States," said Hitoshi Ichio, a strategist at Commerz Securities in Tokyo. "But there are strong hopes in the market that the start of new investment trusts will help boost liquidity in the market."

Four new funds were set up last Friday, and Nomura Asset Management is due to launch a one trillion yen fund on Wednesday with a ceiling of one trillion yen ($9.34 billion) -- roughly double last year's buying in investment trusts.

Traders said gains in large-cap, infotech issues such as Sony Corp and NTT Corp should help the Nikkei head toward the 20,000 level, possibly breaching it for the first time since mid-1997.

The Nikkei average closed last Friday at 19,434.78, up 2.95 percent on the week.

But market players also fear a rise led by such large-caps could pose a downside risk in itself, raising the chance of a steep correction on market indices. That could be triggered especially if the FOMC announces a steep rate hike.

"The market consensus is for a 25 basis point rate hike, and if the FOMC doesn't disappoint, U.S. stocks should rise in reflection of their good corporate earnings," said Masaaki Higashida, deputy general manager at Nomura Securities.

"If there is a steeper hike, the Dow should fall about 500 to 1,000 points, and that would definitely hurt sentiment in Tokyo as well," he said.

But others said Tokyo's resilience to losses on Wall Street last week was taken as a sign that the Japanese market could head higher on its own.

A Reuters survey of Japanese financial institutions showed major Japanese investors were expected to increase their weighting for domestic shares in February for the sixth month in a row.

A monthly Global Asset Allocation survey showed the weighting on U.S. shares had slightly eased.-Reuters