Nikkei falls 1 pct after sharp rally, ahead of BOJ

TOKYO, Dec 20 (Reuters) - Japan's Nikkei average fell 1 percent on Thursday, ahead of the Bank of Japan's policy meeting, after a sharp rally in the previous session that took the index to end above 10,000 for the first time since early April. The Nikkei lost 98.06 points to 10,062.34 in mid-morning after surging 2.4 percent to 10,160.40, logging its biggest one-day percentage rise since September 2011, on Wednesday. Automakers were among the worst sectoral performers after a 7.7 percent slump in Mitsubishi Motors Corp after it said it would recall about 1.2 million minicar vehicles in Japan due to faulty engine oil seals. Honda Motor Co dropped 2.1 percent and Nissan Motor Co shed 5.2 percent. "We are seeing profit-taking. The automobile stocks are being hit by Mitsubishi Motors recall. The main thing that's driving the market at the moment is just a little bit of judicious concern ahead of the Bank of Japan meeting," a senior dealer at a foreign brokerage said. "There is a bit of consensus that if the Bank of Japan doesn't do anything today there will be a sell-off. I disagree with that. But as we come close to the end of the year, for a lot of market participants, tomorrow is the last day, so you are going to close out your books." The Bank of Japan is expected to deliver its third dose of monetary stimulus in four months in a prelude to more aggressive action next year, as it faces intensifying pressure from the country's incoming leader for stronger efforts to beat deflation. Shinzo Abe, whose opposition Liberal Democratic Party won Sunday's election by a landslide, has called for the BOJ to adopt bolder policy action, including embarking on "unlimited easing" and setting an inflation target of 2 percent. His comments have softened the yen, which boosts the appeal of exporters' shares. The Nikkei has rallied 16.1 percent over the past five weeks, taking the year-to-date gain for the Nikkei to 19 percent, outperforming a 14.2 percent rise in the U.S. S&P 500 and a 15.2 percent gain in the pan-European STOXX Europe 600. Still, Japanese equities are much cheaper than their U.S. counterparts, with a 12-month forward price-to-earnings ratio of 12.1 versus S&P 500's 12.7, data from Thomson Reuters Datastream showed. The STOXX Europe 600 carries a 12-month forward P/E of 11.4.

STILL OVERBOUGHT Despite Thursday's fall, the Nikkei was still deep in "overbought" territory, with its 14-day relative strength index at 77, way above 70 which is deemed overbought and signalling that a correction may be imminent. Other exporters also succumbed to profit-taking, including Canon Inc, Ricoh Ltd and industrial robot maker Fanuc Corp, down between 1.6 and 2.7 percent. Sharp Corp was down 2.6 percent but it was still up 74 percent this month on short-covering as the broader market rallied and after its announcement in early December that U.S. chipmaker Qualcomm Inc would invest $120 million in the struggling TV maker. It was the most-traded stock on the main board by turnover. Short-selling interest in Sharp has eased, although it still remains high, with 90.49 percent of its stock that is available to be borrowed out on loan as of Dec. 18, down from 93.46 percent on Nov. 30. The broader Topix slipped 0.5 percent to 835.13. Insurers dropped 2.3 percent after jumping 6.4 percent in the previous session.