By Ayai Tomisawa
TOKYO (Reuters) - Japan's Nikkei share average ended slightly lower on Friday, coming off a seven-month high, as profit-taking kicked in on a near month-long rally that has been inspired by yen weakness on expectations of bold central bank action.
Although the Nikkei managed to hold above the 9,500 mark for a second day in a row, on the charts it is just shy of 'overbought' territory and some analysts said that profit-taking could continue into the week ahead.
Its 14-day relative strength index stands at 69.0. A level of 70 or above is deemed overbought, and can often signal a pullback in the near term.
Some analysts said foreigners, especially hedge funds such as commodity trading advisers, had started selling Nikkei futures.
"Now that the index ended above 9,500, they are unwinding their positions," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
Fujito added that more position unwinding of futures may be seen next week ahead of a quarterly December Nikkei 225 futures and options settlement on December 14.
The Nikkei dropped 0.2 percent to 9,527.39 after hitting a 7-month high of 9,572 earlier in the session. It has gained 10 percent over the past 3-1/2 weeks.
Spurring gains has been a weakening in the yen after Shinzo Abe, the leader of the opposition party expected to win a December 16 general election, called for the Bank of Japan to embark on "unlimited easing" and set an inflation target of 2 percent.
Kyoya Okazawa, head of global equities and commodity derivatives at BNP Paribas in Tokyo, said many foreigners in the market remained sceptical of the potential for change but had been forced to chase the rally higher as it gained momentum.
"They are sceptical about Japan changing, the BOJ changing," he said.
The benchmark Nikkei is up 12.7 percent this year, slightly ahead of a 12.4 percent rise in the U.S. S&P 500 but behind a 14 percent gain in the pan-European STOXX Europe 600 index.
A Reuters poll showed half of Japan's manufacturers say their top request for the winner of the election is a push to weaken the yen, which they see as critical to reviving the country's economy.
U.S. PAYROLLS DATA
The broader Topix index added 0.2 percent to 790.24 in active trade, with 2.09 billion shares changing hands on the main board. This week, average daily trading volume was 1.90 billion shares.
Investors are waiting on November nonfarm payrolls data due at 1330 GMT to see how much superstorm Sandy disrupted U.S. economic activity.
Economists in a Reuters survey forecast 93,000 jobs were created in the United States last month compared with 171,000 in October, while the unemployment rate is seen at 7.9 percent.
Electronics stocks weakened, with Nikon Corp shedding 1.6 percent and Toshiba Corp <6502.T> dropping 1.1 percent.
But automakers rose, with Nissan Motor Co and Honda Motor Co, up 0.1 percent and 0.6 percent respectively.
Sharp Corp <6753.T> surged 8.5 percent to a three-month high, extending the previous session's 9.9 percent jump on short covering. A newspaper quoted Hon Hai Precision Industry's chairman as saying that Sharp's tie-up with Qualcomm Inc will not affect Hon Hai's talks to invest in the struggling Japanese company.
Short-selling interest in Sharp has fallen lately, although it still remains high with 91.41 percent of its stock that is available to be borrowed out on loan as of December 5, down from 93.46 percent on November 30, according to data provider Markit.
(Editing by Edwina Gibbs)