By David McMahon
TOKYO, Sept 22 (Reuters) - Tokyo stocks are expected to climb cautiously in a holiday-shortened week, buoyed by hopes of fresh anti-deflation measures from the government, but with volatility on Wall Street looming as a downside risk.
The market resumes trading on Tuesday after Monday's Autumnal Equinox holiday.
The Nikkei average rose 2.59 percent last week to finish at 9,481.08, boosted by a bombshell announcement by the Bank of Japan (BOJ) on Wednesday that it planned to buy shares directly from banks as a means of shoring up the financial system.
On Saturday, a top White House economic adviser said the BOJ should ease monetary policy further in an effort to overcome an "entrenched" deflation.
"During the past year, the Bank of Japan had undertaken steps to increase current account balances, but expansionary policy appears to be losing its momentum," Glenn Hubbard, chairman of the White House Council of Economic Advisers said at a conference.
Analysts said the sustainability of any rally would depend on the government grabbing the baton from the BOJ and pushing ahead with complementary measures to battle deflation.
"The ball is firmly in the government's side of the court now," said Tetsuya Ishijima, senior investment strategist at Okasan Securities.
"Now we urgently need some complementary policies to put a stop to asset deflation -- without which a solution to the banking problem and sustained rises in stocks are impossible."
DIVIDED ON TAX CUTS
On Thursday government data showed that land prices have fallen for 11 straight years, highlighting the deflationary pressures still weighing on growth in Japan's economy.
A meeting of finance ministers from the Group of Seven industrial nations (G7) will take place on September 27 in the United States, and some analysts expect Prime Minister Junichiro Koizumi to use the occasion to announce new policy measures.
But late Friday, Koizumi said steps to speed up the disposal of bad loans in the banking sector would be announced in October.
Adding to the uncertainty, a member of Koizumi's Council on Economic and Fiscal Policy said on Friday that economic advisers were still divided on the size and details of planned tax cuts.
Traders said the Nikkei would likely move between 9,000 and 9,900 this week, ranging widely due to uncertainty about the government's policy response to the BOJ.
The Dow Jones industrial average fell 3.9 percent last week after profit warnings from the likes of computer services giant Electronics Data Systems Corp rattled investors.
"I think there's a good chance we'll see further earnings warnings in the U.S. this week, increasing global volatility in stocks. That may drag us down in Tokyo." said Yutaka Miura, deputy manager of equity information at Shinko Securities.
CROSS-SHAREHOLDING ISSUES
Issues with a high rate of ownership by the banks, such as auto giants Toyota Motor Corp and Honda Motor Co Ltd , and gamemaker Nintendo are expected to continue to attract buyers, however.
Exporters such as Toyota can also expect support from a weaker yen, which inflates dollar-denominated earnings.
The yen was trading around 123.30 to the dollar in late New York trade on Friday, down more than 1.50 percent on the day and not far from a three-month low of 123.72.
Banking shares are also expected to show resilience, with the BOJ's plan seen as allowing them to dump risky assets that threaten to eat into their capital base.
On Thursday Mizuho Holdings Inc , the world's biggest bank by assets, leapt 14.8 percent, before reversing around half of those gains on Friday.
On Friday afternoon, news that an auction of 1.8 trillion yen ($14.8 billion) of 10-year government bonds was undersubscribed for the first time ever, underscored the risks in the BOJ's policy gamble to buy stocks from banks.
The yield on the benchmark241st 10-year cash bond jumped 12.5 points to 1.305 percent, threatening the value of the massive amount of JGBs held by Japan's banks.
Analysts say the outlook for Japanese stocks would also depend heavily upon the movement of foreign investors, who, according to data released on Friday, were net sellers for the third straight week in the week ended September 13.
Foreigners are the single most influential players in the Tokyo market, accounting for around 50 percent of turnover.
"I think that perversely, Japanese stocks could become a relative safe haven destination in the event of further global volatility... With prices already pretty low, and bearish scenarios already priced in, there's not so much room to disappoint in Japan," said Patrice Conxicoeur, CEO at Sinopia T&D Asset Management, which manages 100 billion yen. DIARY
SUNDAY, SEPTEMBER 22
-- Asia-Europe Heads of State and Government summit Copenhagen (to Sept 24). PM Junichiro Koizumi attends.
MONDAY, SEPTEMBER 23
-- Market holiday.
-- Main opposition Democratic Party holds leadership election ahead of expiry of incumbent Yukio Hatoyama's two-year term at the end of the month.
TUESDAY, SEPTEMBER 24
-- July all-industries, tertiary sector index released.
WEDNESDAY, SEPTEMBER 25
-- Ministry of Finance to announce customs-cleared trade figures for August.
FRIDAY, SEPTEMBER 27
-- Worker household spending, unemployment, jobs-applicants ratio, nationwide core CPI, retail sales for August.
-- Tokyo-Area core CPI for September.
-- JFE Holdings Inc born as one of the world's top three steelmakers via merger of NKK Corp and Kawasaki Steel Corp.
-- Group of Seven meeting of finance ministers to convene in United States.