By Tomo Uetake
TOKYO (Reuters) - Japan's Nikkei average shed 0.9 percent on Friday, extending the previous session's decline as investors fretted about the implications of the Federal Reserve's plan to wean off the U.S. economy's dependence on cheap money.
The Nikkei was down 113.27 points at 12,901.31, hitting a one-week low after falling 1.7 percent on Thursday. It is still up 1.7 percent this week, on track to post its first weekly rise in five weeks.
"A tapering in the U.S. on the back of an improving economy should be a perfect scenario for Japan," said a senior trader at a foreign bank in Tokyo. "You have a situation of U.S. yields backing up and U.S. dollar strengthening. The yen should weaken against that and one of Japan's major export markets is getting better."
"What's going on now is about risk reduction as the market adjusts to the idea that there is going to be less free money around."
Concerns over the Fed's plan to eventually stop pumping cheap money into the economy next year have rattled investors as they cut their exposure in global equities, bonds and commodities, which have been underpinned by the flood of central bank liquidity in recent years.
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The senior trader, however, said the bank had equal amounts of buy and sell orders, even though the broader market was weaker on Friday, adding that investors were adjusting their books.
All but two of the TOPIX's 33 sectors lost ground. Real estate companies, which have been buoyed by Tokyo's drive to reflate the economy, were among the worst performers, down 4.1 percent.
Financials, which were heavily traded, also came under pressure, with Nomura Holdings, Japan's top brokerage, off 3.9 percent and the securities sector down 4 percent.
Lender Mitsubishi UFJ Financial Group dropped 2.6 percent and Sumitomo Mitsui Financial Group eased 0.8 percent. They were the second- and fourth-most traded stock, respectively, on the main board by turnover.
Toyota Motor Corp, down 1.4 percent, was the most traded.
The broader Topix index lost 1.5 percent to 1,075.21 by the midday break, with volume at 35 percent of its full daily average for the past 90 trading days.
The benchmark Nikkei has lost 17 percent since hitting a 5-1/2-year peak on May 23 on concerns over Fed stimulus as well as slowing growth in China, Japan's second-largest export market, and disappointment over Prime Minister Shinzo Abe's recently unveiled growth strategy to revive the economy.
Japanese equities' 12-month forward price-to-earnings has also come down sharply, from a three-year high of 16.3 reached three weeks ago to 13.6, a level not seen since the Bank of Japan launched radical monetary stimulus steps in early April, according to Thomson Reuters Datastream.
Still, the index is up 4 percent since the BOJ announcement and has risen 24 percent this year, underpinned by the sweeping government efforts to pull the world's third-largest economy out of deflation.
"There is no need to become pessimistic about Japanese stocks. I regard this as a mere correction before the next round of bull-run," said Kenichi Hirano, adviser and market analyst at Tachibana Securities.
He predicts the Nikkei will break through the 16,000-mark later this year.
(Additional reporting by Dominic Lau; Editing by Jacqueline Wong)