Nikkei ends flat as Fed nerves snuff out early rally

Japan's Nikkei share average shed early gains to end little changed on Wednesday as caution took hold of the market before a crucial U.S. Federal Reserve policy decision later in the day.

At the same time, there was a wide split between the big winners and losers as investors reacted to domestic earnings reports.

The Nikkei finished 0.07% higher at 27,346.88, after gaining as much as 0.81% to 27,547.67 earlier in the session, a one-and-a-half-month high.

The broader Topix TOPIX slipped 0.15% to 1,972.23, giving up early gains.

Both the Japanese stock benchmarks initially rallied following gains of more than 1% for each of the big-three Wall Street indexes after data showing a slowdown in the pace of labour cost rises in the United States added to the case for a slowing of aggressive Fed policy tightening.

Money markets have priced in a quarter-point rate hike later Wednesday, down from half a point previously and 75 basis points before that.

"For the moment, the market's focus is on the outlook for monetary policy, and if the U.S. economy will have a soft or hard landing," Maki Sawada, a strategist at Nomura Securities, said in a briefing with journalists.

Eighty-two of the Nikkei's 225 constituents rose, while 137 fell and six remained unchanged.

Tokyo Gas 9531 topped the Nikkei, gaining 5.48%, followed by chip-making equipment maker Screen Holdings 7735, which added 5.12%, and electronic-components maker Alps Alpine 6770, which rose 5.06%, all after announcing financial results.

Housing materials maker TOTO 5332 led losers, dropping 8.37%, followed by office equipment manufacturer Seiko Epson's 6724 5.83% slide, also after earnings announcements.

The risk of earnings downgrades is likely to keep Japanese stocks heavy in the first half before a rebound at the tail end of the year once global business confidence improves, partly as China's economy gathers pace, said Yoko Arai, chief global investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

At current levels, the Nikkei "is still a little bit cheap relative to fundamentals," she said.

"Still, sentiment is very negative, so it will take time for a full recovery."