Japan's Nikkei tracks US peers lower; shrugs off BOJ

(Updates after BOJ decision)

TOKYO, Oct 31 (Reuters) - Japan's Nikkei share average index traded weaker on Thursday, tracking an overnight drop in the U.S. markets and unaffected by a widely expected Bank of Japan policy decision to keep rates steady.

The Nikkei was down 0.48% at 39,087.15 at 0331 GMT, while the broader Topix slipped 0.34% to 2,694.73.

"The Nikkei tracked the overnight declines in U.S. equities, but the Nikkei has also retreated from gains in the previous session, which were too strong," said Shigetoshi Kamada, general manager at the research department at Tachibana Securities.

The Nikkei rose to a two-week closing high on Wednesday.

Since peaking in July, it has been hostage to a volatile yen , driven by U.S. Federal Reserve rate expectations and the dollar. Still, the index has risen more than 17% this year.

Japan's markets have been hamstrung this week by political uncertainty after the ruling Liberal Democratic Party-led coalition lost its parliamentary majority in the weekend election.

The make-up of the future government is in flux and Prime Minister Shigeru Ishiba and the LDP may court smaller opposition parties that favour maintaining ultra-loose monetary policy and oppose plans to raise taxes.

The Bank of Japan maintained its ultra-low interest rates on Thursday and signalled the need to scrutinise global economic developments, highlighting its focus on risks to a fragile domestic recovery in deciding when to next tighten policy.

Among stocks, Uniqlo-brand owner Fast Retailing (FRCOF) fell 1.5% and was the biggest drag on the Nikkei.

Kyocera (KYOCF) tanked 11.1% after the ceramics maker cut its full-year operating profit forecast.

Advantest (ADTTF) jumped 8% as the chip-testing equipment maker raised its annual operating profit forecast. (Reporting by Junko Fujita; Editing by Alan Barona and Sherry Jacob-Phillips)