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Tokyo - The Federal Reserve's policy meeting will be high on Tokyo investors' radar screens next week with speculation mounting that the central bank plans to start winding down its stimulus programme.
Also in focus will be President Barack Obama's choice to head the central bank, with reports suggesting he favours former treasury secretary Lawrence Summers, who is seen as more averse to the bond-buying scheme than incumbent Ben Bernanke.
A pullback on the Fed's monetary easing would likely boost the dollar against the yen, which tends to lift shares of Japanese exporters.
"Investors mainly held on to their positions before the holiday weekend and ahead of the Federal Open Market Committee's decision on tapering its stimulus," said Maki Shimizu, senior strategist at Citigroup Global Markets Japan. The Tokyo market will be closed Monday for a national holiday.
Seiichi Suzuki, market analyst at Tokai Tokyo Securities, said the Nikkei could see "nervous trading" ahead of the Fed's September 17-18 meeting.
At home, Prime Minister Shinzo Abe appears set to usher in a sales tax hike next year, which is seen as crucial to bringing down Japan's mammoth national debt.
But there are fears a rise from 5.0% to 8.0% could choke Abe's economy-boosting blitz, which has been credited with weakening the yen and stoking a 39% rise in the Nikkei since the start of the year.
The Nikkei's modest 0.12% gain on Friday ended a week that saw the benchmark index rise 3.92%, or 543.86 points, to 14 404.67, while the broader Topix index of all first-section shares added 3.30%, or 37.94 points, to 1 185.28.
Japanese stocks soared earlier this week as Tokyo's successful bid to host the Olympics sparked buying of construction and real estate firms, but the rally proved to be short-lived.
"Stocks remain somewhat overheated as well, and with the holiday-extended weekend coming up, players really have no incentive to keep buying," Hiroichi Nishi, SMBC Nikko Securities general manager of equities, told Dow Jones Newswires.
Sentiment got a modest boost Friday from a monthly government report for September in which Tokyo boosted its assessment of the world's third-largest economy for the first time in two months.
Tokyo also revised upward Japanese factory output for July to 3.4% on-month from a 3.2% initial estimate, another upbeat sign for the government's economic growth effort.
On Friday Sony slipped 0.33% to ¥2 096, Toyota added 0.15% to ¥6 280, Uniqlo operator Fast Retailing was up 0.56% at ¥35 500 and Canon gained 0.47% to ¥3 200.
On currency markets, the dollar bought ¥99.68, up from ¥99.47 in New York but well below the ¥100.50 level on Wednesday.
