TOKYO (Reuters) - Japan's Nikkei average shed 2.4 percent on Friday as concerns mounted that Cyprus may be forced to exit the euro zone after the European Union gave the island's government until Monday to raise the billions of euros it needs to secure a bailout.
The Nikkei ended 297.16 points lower at 12,338.53, retreating from 12,650.26 hit on Thursday, its highest intraday level since early September 2008.
The benchmark lost 1.8 percent on the week, its second weekly loss out of the past 19 weeks and the biggest weekly decline since November.
Exporters with high exposure to Europe led the declines, with Mazda Motor Corp (7261.T) dropping 2.7 percent, Nikon Corp (7731.T) losing 3.2 percent and Shimano Inc (7309.OS) shedding 6.3 percent.
"These are some of the stocks which investors want to unload when uncertainty over Europe grows," said Naoki Fujiwara, a fund manager at Shinkin Asset Management.
Stock losses accelerated in the afternoon trade, especially in the last 10 minutes, as investors locked in profits before the weekend.
"They were quick to take profits as they are worried that U.S. stocks may fall later in the day on Cyprus fears," said Kenichi Hirano, a strategist at Tachibana Securities.
The heightened worries about Cyprus and risk of contagion in
the euro zone have seen investors seek shelter in the safe-haven yen. That has put pressure on the Nikkei as investors fret the recent weakening trend in the yen may stall and undermine the export-driven economy.
The yen was quoted at 94.71 to the dollar on Friday after gaining 1.2 percent on Thursday, and was up 0.2 percent against the euro at 122.13 after rising 1.5 percent on Thursday.
If the government of Cyprus fails to secure enough funds, it could face a collapse of its financial system that could push it out of the euro currency zone.
The broader Topix dropped 1.9 percent to 1,038.57 in a relatively light trade, with 2.46 billion shares changing hands, compared with last week's average daily volume of 3.72 billion.
"Yesterday's rally (to a fresh 4-1/2-year high) gave the market a feeling of some accomplishment. So investors locked in profits before the weekend," said Yuya Tsuchida, a strategist of Toyo Securities.
"Unless significant progress is made on Cyprus problem or (Bank of Japan Governor Haruhiko) Kuroda calls an emergency board meeting, investors are likely to be in risk-off mode for a while, probably until the Bank of Japan's first policy meeting (on April 3 and 4)."
The Nikkei has gained about 19 percent this year, and the yen has weakened 9 percent on the back of Prime Minister Shinzo Abe's bold fiscal expansionary and monetary easing policies aimed at ending persistent deflation and reviving the economy.
On Thursday, Kuroda said in his inaugural news conference that further bold easing measures were needed to beat deflation.
With Kuroda providing few clues on calling an emergency meeting before April 3-4 to push through stimulus, analysts said the Nikkei is unlikely log big gains ahead of the meeting.
In the longer term, however, as the recovery in the U.S. economy gathers momentum, foreign investors are likely to pour more money into Japanese equities, analysts said.
In the past 18 weeks through March 16, foreign investors bought 5.83 trillion yen worth of Japanese stocks, versus 5.80 trillion yen in their 19 straight weeks of net buying from late 2005 to early 2006 when Junichiro Koizumi was the prime minister.
"The Japanese market could see solid gains in the long run if the U.S. economy's recovery strengthens the dollar; then we may get similar rallies to those seen back in 2005-2006 if the dollar trades around 120 yen like it did at that time," said Michiro Naito, executive director of equity derivatives strategy at JPMorgan.
(Additional reporting by Ayai Tomisawa; Editing by Kim Coghill)