October 4, 2018 / 7:28 AM / in 2 months

Nikkei drops to 1-week low on profit-taking but automakers, financials rise

* Banks, insurers outperform on rising U.S. yields

* Toyota and SoftBank partner on self-driving technology

By Ayai Tomisawa

TOKYO, Oct 4 (Reuters) - Japan's Nikkei dropped to a one-week low on Thursday as investors took profits after a recent rally lifted the index to a 27-year high, but Toyota and SoftBank rose after they announced a partnership on auto driving technology.

Analysts said sentiment soured late in the session due to weakness in Asian shares on worries about rising borrowing costs and to indications of a fall later in New York, with eMini futures for the S&P 500 and Dow e-minis both down 0.5 percent.

The Nikkei share average ended 0.6 percent lower at 23,975.62, its weakest close since Sept. 27, as market participants reckoned the benchmark had been overbought in the recent rally.

"Asian shares were overall weak on the back of a strong dollar and rising U.S. yields, but the Japanese market's downside was somewhat supported by the weaker yen," said Masashi Oda, general manager at Sumitomo Mitsui Trust Asset Management.

Oda said that the weak yen should raise prospects for Japan Inc to post stronger-than-expected earnings, but given the recent rally, it was natural to see profit-taking.

The Nikkei has traded more than 5 percent above its 25-day moving average recently, a sign the market is overbought.

Index-heavyweight stock Fast Retailing, which rose 2 percent last week, fell 0.9 percent on profit-taking, taking a hefty 20 points off the Nikkei.

Toyota Motor Corp bucked the weakness, rising 0.6 percent after it and SoftBank Group Corp said they will team up to develop car services that rely on self-driving technology.

SoftBank rose 1.3 percent.

Honda Motor Co added 0.2 percent after saying it will invest $2.75 billion and take a 5.7 percent stake in General Motors Co's Cruise self-driving vehicle unit, to jointly develop autonomous vehicles for ride services fleets around the world.

Analysts said that the weak yen is serving as a tailwind for the auto sector as the dollar traded at 114.55 yen, its highest since early November 2017.

The upbeat U.S. economy is supporting the dollar, particularly after Federal Reserve Chairman Jerome Powell said on Wednesday that the central bank may raise interest rates above an estimated "neutral" setting as the "remarkably positive" U.S. economy continues to grow.

Insurers and banks, which hunt for higher-yielding products such as U.S. bonds, soared after U.S. Treasury yields jumped to multi-year peaks.

Dai-ichi Life Holdings surged 3.4 percent and T&D Holdings climbed 3.8 percent. Other big gainers were Sumitomo Mitsui Financial Group, up 2.7 percent, and Mitsubishi UFJ Financial Group, 3.1 percent.

Reporting by Ayai Tomisawa; Editing by Richard Borsuk

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