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By Sophie Knight
TOKYO (Reuters) - Japan's Nikkei share average firmed during Friday's morning session, but gains on a report that central banks will take action to prevent a credit squeeze if turmoil hits the markets was limited by bearish sentiment ahead of the pivotal Greek election.
Investors cut their exposure to Europe and focused on stocks driven by domestic demand such as Fast Retailing, convenience store operator Lawson and pharmaceuticals.
" Sellers are short-covering while net buyers are cutting down a little bit for protection, but the market is very illiquid," said Hideyuki Ishiguro, assistant manager of investment strategy at Okasan Securities. "But the election result will at least give the market a direction. Even in the worst-case scenario a policy response should come forth to calm the markets."
The Nikkei rose 0.3 percent to 8,595.88 while the broader Topix also gained 0.3 percent to 727.88 after both indexes entered negative territory in early trading.
DeNa co Inc was the top gainer, shooting up 14 percent as the second most-traded stock by turnover after the social gaming site operator said on Thursday it will buy back up to 10 percent of its outstanding shares - 20 billion yen worth. Its competitor Gree Inc was the most-traded share with a gain of 7.5 percent.
Fast Retailing rose 1.2 percent while Lawson Inc put on 1.7 percent, ahead of the retailing sector's gain of 0.7 percent. Pharmaceuticals were strong, buoyed by a 2.5 percent gain for both Nippon Shinyaku and Kaken Pharmaceutical Co Ltd.
"The market looks slightly stronger but that doesn't mean anyone is feeling any more confident about what's coming up," said Fujio Ando, senior managing director of Chibagin Asset Management, referring to Sunday's election that could lead to Greece exiting the euro.
"Look at industrial orders crashing in Europe - the impact of the euro zone's problems are spreading, just like in 2008."
European machine tool orders from Japanese companies fell 30 percent in May, according to the Nikkei business daily. Industrials robotics maker Fanuc Ltd and industrial machinery maker Komatsu Ltd <6301.T> fell 0.5 percent and 0.4 percent respectively.
Sumitomo Heavy Industries slipped 2.2 percent after Deutsche Securities cut its target price to 370 yen from 470 and lowered its operating profit forecast for the present year by 5 percent.
The Bank of Japan said during the midday break that it would not be introducing any further monetary easing following its two-day policy meeting, potentially disappointing those hoping that for a coordinated response from central banks to the euro zone crisis.
U.S. stocks rose overnight after Reuters reported G20 officials saying the central banks of major economies were ready to provide liquidity and prevent a credit squeeze if the Greek election on Sunday triggers market turmoil.
"Most people aren't expecting the BOJ to budge before such important events next week, but there could be a bit of disappointment if they don't," said Masayuki Doshida, senior market analyst at Rakuten Securities, Inc. "The pressure on them to act is increasing because of the expectation that the Fed will ease, particularly after the Bank of England decision."
Bank of England governor Mervyn King said on Thursday the bank will flood its banking system with cash to jumpstart Britain's ailing economy and provide cheap long-term funding to banks to encourage lending to businesses and consumers.
The Nikkei has trod in a tight range this week ahead of the weekend poll in Greece that many perceive as a gamechanger. However, the benchmark index's relative strength index is now well out of "oversold" territory, with its 14-day relative strength index at 44.9, well above the danger 30-level.
The Nikkei is also poised to end the week up more than 1 percent after gaining 0.2 percent last week to snap a 9-week losing streak, its worst run in 20 years.
(Editing by Kim Coghill)