Nikkei scrambles back above 8,500 on late rally

Bout of short-covering in low volume by short-term investors acted as a trigger

Japan's Nikkei average bounced to a modest gain on Thursday after a last-minute rally, likely triggered by a bout of short-covering in low volume by short-term investors as long-term market players stood still amid euro zone uncertainty.

The Nikkei inched up 0.1% to 8,563.38 after creeping down past the psychologically key 8,500 level to 8,496.61. The index is down 0.6% for the week, on track for eight straight weeks of losses, its longest such run since 1992.

"Market liquidity is at its lowest day for the year, you can just push this market around," said a senior trader at a foreign bank. "Everybody's so short that it can turn around very fast indeed. The market might even be greeting the Sharp-Honhai news with a round of applause."

Sharp Corp shot up 7.1%, shadowing the benchmark's rally after the Nikkei business daily's website reported it will jointly produce panels for Apple Inc's iPhone and other consumer electronics products in China.

Renesas Electronics Corp advanced 1.9%, glancing off Wednesday's lifetime low after the chipmaker said it plans to tie up with Taiwan Semiconductor Manufacturing Co in the microchip business.

The broader Topix index put on 0.1% to close at 722.25.

Defensive stocks saw steady gains as investors shied away from risky assets, with the food sector outperforming the index throughout the day and closing up 0.3%.

The construction sector put on 1%, aided by gains from bridge building companies set to benefit from West Japan Railway Co's plan to invest 100 billion yen to further quakeproof its railway systems, reported in the Nikkei business daily.

Panasonic Corp lifted up from a recent 32-year low with a 1.9% gain after Nomura Securities praised the company's steady growth strategy and expansion in emerging economies, detailed at the company's investor relations meeting on Wednesday.

The Nikkei found resistance after creeping below 8,500, a psychologically key level that market participants say the benchmark index will continue to test over the next few days.

"Normally, the market would rebound to 8,700 from here. But then again it would normally find resistance at 9,000 and yet it didn't, no rebound, no pausing," said Makoto Kikuchi, Makoto Kikuchi, CEO of Myojo Asset Management. "It's possible that there's not so much-bargain hunting because people don't expect a rebound."

Euro worries weigh

Japanese markets have been pressured recently by fears that a June 17 election in Greece could result in the country's messy exit from the euro zone. European Union leaders on Wednesday urged the country to stay the course on austerity and complete the reforms demanded under its bailout programme.

"The market is basically fighting against the wind at the moment," said Yuuki Sakurai, the CEO of Fukoku Capital Management. "The mid- and long-term investors don't want to budge until the Greece problem is resolved, so the short-term investors have the market to themselves."

Data from Japan's Ministry of Finance showed foreign investors sold a net 131.3 billion yen of Japanese stocks last week, their fifth straight week of net selling.

The Nikkei was in "oversold" territory on Thursday, with its 14-day relative strength index at 27.3. Thirty or below is considered oversold.