August 17, 2016 / 2:37 AM / 2 years ago

Nikkei rebounds, upside limited as investors wary of Fed outlook

* Stocks will likely continue depending on forex - analysts

* Defensive stocks underperform

By Ayai Tomisawa

TOKYO, Aug 17 (Reuters) - Japanese stocks bounced on Wednesday morning after sliding the previous day, but investors were cautious after hawkish comments from U.S. Federal Reserve officials sent the yen to a seven-week high overnight.

The Nikkei rose 0.6 percent to 16,691.58 in midmorning trade after it tumbled 1.6 percent to a more than one-week low on Tuesday.

The dollar nudged up 0.2 percent to 100.485 yen during Asian trade after falling to 99.550 overnight, its lowest since June 24.

U.S. stocks fell after New York Fed President William Dudley and Atlanta Fed chief Dennis Lockhart both said in public statements that the U.S. central bank could raise the nation’s short-term interest rates at its September policy meeting.

Traders said that Japanese stocks will likely track the dollar-yen level, and any further rise in the yen will put pressure back on stocks regardless of the quantity of exchange traded funds the Bank Of Japan may buy to support the market.

“The market knows that companies are struggling with profit falls due to the strong yen. Stock prices reflect their fair value after all, so the BOJ’s ETF buying itself will not likely be the driver for stocks in the long term,” said Seiki Orimi, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

He said that developments surrounding a U.S. rate hike will likely set the direction of the market for the moment, noting that comments by Fed officials will continue to be watched closely by investors over the next few weeks.

Exporters were in demand, with Honda Motor Co rising 2.3 percent and Advantest Corp adding 1.6 percent.

Banks also rose, with Mitsubishi UFJ Financial Group gaining 2.6 percent and Mizuho Financial Group adding 2.1 percent.

Conversely, defensive stocks underperformed. Construction companies Kajima Corp shed 2.5 percent and Taisei Corp declined 2.4 percent.

The broader Topix gained 0.5 percent to 1,305.20 and the JPX-Nikkei Index 400 advanced 0.6 percent to 11,751.46. (Editing by Shri Navaratnam)

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