Asia Ends Off Session Lows; Mood Cautious

Asian stock markets rebounded on Friday to erase earlier losses, but weak economic growth in Europe and worries the U.S. Federal Reserve might scale back its quantitative easing program capped major gains.

Japan's Nikkei 225 traded at its highest level in more than two-and-a-half years despite coming off Wednesday's 52-week high. South Korea's KOSPI finished above the 2,000-mark, within reach of a 7-week high and Australian shares lingered near a four-and-a-half-year high. Amid regional losers, the Shanghai Composite logged a near 4 percent weekly loss.

One analyst tells CNBC he expects markets to lose more ground in the short term. "We do not see any central banks stepping back from monetary easing so essentially, you've put a floor on equity prices so we think this correction has a bit further to go but it will be probably limited in time and duration," remarked Hans Goetti, chief investment officer at wealth management firm Finaport.

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In Australia, markets cheered comments by Reserve Bank of Australia governor Glenn Stevens as he painted an optimistic outlook in his semi-annual testimony early Friday, stating that the economy already has a good deal of monetary policy stimulus.

(Read More: Aussie Dollar at $1.30: Are You Kidding? )

However, some analysts disagreed with the governor to voice further need for rate cuts. "I think the transition from the growth in Australia driven by the mining boom to growth elsewhere will be less seamless...and therefore my connotation is to think there's still scope to cut interest rates a bit further," said Shane Oliver, head of investment strategy and chief economist at AMP Capital.

The benchmark index posted a weekly gain of nearly 2 percent, boosted by a better-than-expected earnings season.

Property stocks are the focus of Chinese markets after home price data for the month of January rose 0.8 percent from a year earlier.

The real-estate sector has been under serious pressure with stocks like China Merchants Property and Lvijing Real Estate down 12 and 8 percent respectively since the beginning of the year as investors worry Beijing may ramp up fresh tightening measures to curb speculation and cool rising property prices.

Another factor affecting sentiment in the mainland is excess liquidity. The People's Bank of China drained funds earlier this week and concerns are rising that there will be less money to go into markets.

(Read More: Is This the Start of China's Tightening Cycle?)

Japanese shared rebounded to close 0.7 percent but the mood was cautious as investors held fire ahead of key upcoming event risks, including the nomination of a new central bank governor.

Prime Minister Shinzo Abe's meeting with U.S. President Barack Obama in Washington on Friday is expected to give signs of future easing as Abe seeks support for his hyper-easy monetary policies to revive Japan's ailing economy.

The yen's three-month decline against the dollar is showing signs of losing momentum as the Japanese currency traded at 93-levels, off last week's 33-month low of 94.4. A weak yen has helped spur a 30 percent rally in the benchmark Nikkei since mid-November and continued strength may hinder further market gains.

(Read More: Currency War Defused? Doesn't Seem Like It )

Currencies also remain a major theme for South Korean shares as incoming South Korean President Park Geun-Hye takes office early next week. The market will be monitoring her efforts to deal with a strong Korean won that makes domestic exporters less competitive compared to Japanese rivals.

The KOSPI under performed Asian peers in January by falling 3.4 percent due to concern over local exporters' outlooks from the weakening yen and strengthening won. However, the index fared better this month, having added 2.7 percent thus far.