Japan's Nikkei narrows losses, yen weakens as BOJ forgoes rate hike

(Updates with closing prices)

By Kevin Buckland

TOKYO, Dec 19 (Reuters) - Japan's Nikkei share average narrowed losses on Thursday as the yen weakened following the Bank of Japan's (BOJ) decision to not hike interest rates.

The yen fell despite widely-held market expectations that Japan's central bank would push policy tightening to January or March, and was down about 0.14% at 155.035 per U.S. dollar by 0634 GMT.

The Nikkei ended the day 0.69% lower at 38,813.58 after finishing the morning session down 0.96%. The BOJ's announcement came during the trading recess.

The broader Topix ended the day down 0.22% after being 0.49% lower at the lunch break.

Japanese government bond yields came off early highs, with benchmark 10-year note yields last at 1.08%, 2 basis points higher than Wednesday's close, after opening the day at 1.095%.

"The BOJ likely decided to give it a miss, judging that it would be fine to wait and confirm the trends for another month," said Takumi Tsunoda, senior economist at Shinkin Central Bank Research Institute.

"But in any case, the conditions for another hike are being met: Japan's inflation is on a slight upward trend and import prices are again beginning to rise a bit due to the weak yen. The BOJ should be able to raise rates easily at the January meeting."

Japanese yields tracked a sharp rise in U.S. peers on Wednesday, when the U.S. Federal Reserve cut interest rates by a quarter point, as expected, but signalled a slower pace of easing next year.

The Fed's hawkish stance sent U.S. stocks sliding, which weighed on Japanese equities at the open.

Japan's rate-sensitive real estate sector was the worst performer on the Nikkei, while financials was the only sector to rise.

Among individual stocks, AI-focused startup investor SoftBank Group stood out, tumbling 4.3%.

Nissan Motor (NSANF) ended a volatile session with a 6.5% gain, the most among Nikkei constituents, after a local media report said merger talks with Honda (HMC) could begin on Monday. Honda (HMC) fell 2%.

(Reporting by Kevin Buckland; Editing by Alan Barona, Sherry Jacob-Phillips, Varun H K and Sumana Nandy)