TOKYO, Feb 27 (Reuters) The Nikkei average rose 0.13 percent on Monday morning, paring earlier gains as some exporters, such as Sony Corp., were sold after the yen rallied to a one-month high against the dollar.
Anticipation of an early end to the Bank of Japan's ultra-easy monetary policy sent the dollar below 116 yen in late morning trade, its weakest since Jan. 26.
But buying continued in shares in companies with bright earnings outlooks, such as non-ferrous metal maker Sumitomo Metal Mining Co.
(SMM), while Nippon Sheet Glass Co. Ltd. rose on hopes for its takeover of a British glass maker.
''It looks like the market is nearing a crossroad over whether to worry about the yen's rise,'' said Masatoshi Sato, a senior strategist at Mizuho Investors Securities.
''If the dollar stays in a 116-121 yen range, that is considered the status quo. But if it moves into a 110-117 yen range, that would eat into potential currency profits (at exporters) and overshadow expected profit growth for next business year,'' he said.
The Nikkei had risen as high as 16,290.15 by midmorning before a rally in the yen stoked concerns about corporate earnings and put a brake on its gains.
It stood at 16,123.29 by midday, up 21.38 points from the previous close.
The broader TOPIX index was up 0.15 percent at 1,650.22.
Among exporters, Sony was down 1.8 percent at 5,550 yen and Toyota Motor Corp. lost 0.5 percent to 6,300 yen.
Japanese interest rate markets have taken a hit since late last week when BOJ Governor Toshihiko Fukui delivered his strongest signal yet of the central bank's intention to end the quantitative easing policy of flooding the banking system with excess cash and pinning money market rates near zero.
Selling continued in short-term Japanese government bonds, resulting in the yield on two-year JGBs reaching its highest level in five years on Monday.
But bank shares failed to gain ground as expectations that the sector will enjoy higher earnings from a rise in interest rates have been somewhat factored into their share prices.
The banking sector subindex IBNKS.fell 0.21 percent to 458.44. It hit a two-week closing high on Friday.
''As has been reported, lending competition is heating up. It seems the market is gradually coming to doubt if all banks have bright earnings outlooks from an expected end to quantitative easing,'' Mizuho's Sato said.
But investors' demand was strong for stocks with high dividend yields ahead of the financial year-end, while easing concerns about selling by foreigners encouraged investors to buy some shares.
Such concerns had helped drag the Nikkei down to a one-month closing low of 15,437.93 on Feb. 20.
''Investors favour steel stocks due to attractive price-earnings ratios and high dividend yields,'' said Yosuke Shimizu, head of Monex Inc.'s investment information centre.
Nippon Steel Corp., Japan's biggest steel maker, rose 2.9 percent to 455 yen, helping send the sector subindex ISTEL.up 1.8 percent.
The sector was extending gains into a fifth straight session.
Business daily Nihon Keizai reported on Saturday that Nippon Steel will likely report a 40 percent rise in its recurring profit this year, topping the firm's own forecast on brisk demand for high-grade sheet steel for use in automobiles.
The paper separately reported that Sumitomo Metal Mining, Japan's top gold and nickel producer, will likely report a full-year profit exceeding the company's own forecast by 27 percent.
Sumitomo Metal Mining rose 2.6 percent to 1,562 yen.
Elsewhere, Nippon Sheet Glass rose 5.6 percent to 511 yen.
British glass maker Pilkington Plc looks set to accept an improved offer of 165 pence a share in cash from Nippon Sheet Glass for the company on Monday, a source familiar with the matter said on Sunday. That would value the British glassmaker at 2.2 billion pounds ($3.8 billion).
The deal would boost Nippon Sheet Glass near Asahi Glass Co.
Ltd. for the top spot in the market.
Trade activity rose to its highest morning level for three trading days, with 1.11 billion shares changing hands on the Tokyo exchange's first section.
Advancers beat decliners 948 to 622.
Reuters CH GC1006