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The Nikkei average slipped on Wednesday, extending the previous session's decline on disappointment that the Bank of Japan offered no fresh measures to quell volatility that has hit the bond market since it embarked on its massive stimulus programme in April.
The Nikkei ended 0.2% lower at 13,289.32 after trading as low as 12,994.08. The index trimmed losses in the afternoon, with traders suspecting the central bank was buying exchange traded funds to support the market.
"The market has been oversold. It is looking for an opportunity to go higher," a senior trader at a foreign bank said, adding that he had more buy orders than sell orders in the afternoon.
Traders noted that there had been a rumour that the Government Pension Investment Fund was in the market during the day but most discounted the rumour, saying that relatively light trading volume did not back it up.
Japan's GPIF, which has more than $1 trillion in assets, said last week it would increase its asset allocation in stocks and trim its exposure in Japanese government bonds (JGBs).
Societe Generale said the most traded Nikkei index stock options was a call with a strike price of 14,000, up 5.3% where the index closed on Wednesday, and with a June expiry. The next-most trade was also a call at 13,750, followed by another call at 13,500.
On Tuesday, the benchmark lost 1.5 % after the BOJ did not announce a new long-dated funding operation to calm the bond market that some had expected.
Ironically, the bond market has stabilised in the past two weeks, with the 10-year JGB yield trading in a range of 0.80 to 0.90%. The 10-year yield was last traded at 0.880% on Wednesday.
VOLATILE MARKET
Trading in Japanese stocks and the yen has become more volatile lately as many global macro funds cut their positions in long Japanese equities and short yen to cash in profits after the Nikkei have rallied more than 80 % from mid-November to a 5-1/2 year peak hit on May 23.
The Nikkei has since fallen nearly 17% from the multi-year high, triggered by concerns over slowing China growth and the US Federal Reserve scaling back its massive stimulus. Investors have also been disappointed with Prime Minister Shinzo Abe's growth strategy to revive the world's third-largest economy.
But the index is still up 7.5% since April 4 when the BOJ announced sweeping stimulus measures, and has risen 28% so far this year.
The real estate sector, which has benefited most by the government's push to reflate the economy, was among the top losers on Wednesday, down 1.7%. It has lost nearly 26% since hitting a 5-1/2 year high on April 12 but is still up 26% so far this year.
Despite the selloff, valuations in the real estate sector remain elevated, with a 12-month forward price-to-book ratio of 2.36, above a five-year average of 1.4 and Japanese equities' current average of 1.24, Thomson Reuters Datastream showed.
The broader Topix index eased 0.4% to 1,096.54, with trading volume hitting a one-month low of 2.99 billion shares.
Exporters also took a battering as the yen strengthened against the dollar. The Japanese currency was last traded at 96.72 yen to the greenback after gaining 2.7% overnight to mark its biggest one-day rise since May 2010, according to EBS trading platform.
Toyota Motor Corp lost 1.8% and was the second-most traded on the main board by turnover, while Mazda Motor Corp , also heavily traded, fell 2.4% and Suzuki Motor Corp sagged 4.3%.
