Nikkei down 1.1 pct on profit-taking before FOMC

* Nikkei slips 1.1 pct, trade thin before FOMC

* Investors trapped between hope and fear for the economy

* Sony slips after brokerage downgrade, exporters fall on yen (Adds detail)

By Elaine Lies

TOKYO, Dec 16 (Reuters) - Japan's Nikkei average slipped 1.1 percent on Tuesday as investors took profits before a key Federal Reserve meeting, with Honda Motor Co (7267.T: Quote, Profile, Research, Stock Buzz) and other exporters down on a strong yen and Wall Street losses.

Sony Corp (6758.T: Quote, Profile, Research, Stock Buzz) slid after a brokerage downgrade that said the company had been slow to react to the current crisis compared with peers at home and abroad, while banks fell in the wake of losses by their Wall Street cohorts on worry about financial firms' earnings due out later this week.

But investors were eager to snap up bargains as well as lock in profits, supported by expectations that measures taken by governments around the world could start to help the worsening global economy some time next year.

"The immediate economy is quite bad, and we still can't say things are stable, but there are signs that an optimistic mood may be starting to spread," said Hideyuki Ishiguro, supervisor of the investment advisory section at Okasan Securities, noting how the Nikkei shrugged off the biggest plunge in business confidence since the first of the 1970s oil crises in a BOJ tankan report on Monday. [ID:nN15513612]

"Expectations, such as for U.S. economic stimulus policies under the new U.S. administration, are starting to win out over the real economy."

Still, trade overall was light amid a dearth of factors, with investors reluctant to move actively ahead of the FOMC meeting.

The U.S. Federal Reserve is expected to cut rates almost as low as those in Japan on Tuesday, as the financial crisis sends many rich countries into recession and hurts growth in major emerging economies such as China and India. [ID:nN15505291]

Bank of Japan Governor Masaaki Shirakawa said conditions are severe for Japan's economy and he is examining the effects of quantitative easing, as government officials become increasingly concerned about a deepening recession.

"The rate cuts are likely to affect the currency market, which could well lead to the yen firming more. Investors are concerned about this," said Yutaka Miura, senior technical analyst at Shinko Securities.

He predicts the Nikkei will be at roughly 9,000 yen at the end of June and around the same level at the end of 2009, with the market likely to come under pressure from a stronger yen during the early part of next year.

The benchmark Nikkei .N225 lost 96.64 points to 8,568.02 yen after rising 5.2 percent on Monday. The broader Topix .TOPX fell 2.2 percent to 828.62.

EXPORTERS, BANKS

The dollar edged down to 90.31 yen but stayed above a 13-year low of 88.10 yen hit on Friday. A stronger yen eats into Japanese exporters' overseas profits when they are repatriated.

Shares of Honda dropped 5.4 percent to 1,973 yen and Canon Inc (7751.T: Quote, Profile, Research, Stock Buzz) lost 1.6 percent to 2,700 yen. Hitachi Ltd (6501.T: Quote, Profile, Research, Stock Buzz) lost 4.2 percent to 391 yen.

Sony lost 5.9 percent to 1,825 yen after Credit Suisse downgraded its rating on the stock to "underperform" from "neutral" and lowered the target price to 1,000 yen from 2,450 yen.

"Compared to its peers both at home and overseas, Sony has been slow to react to the current crisis, and we believe fundamental changes to its business structure are necessary, not only reducing headcount," Credit Suisse analyst Koya Tabata wrote in a note to clients.

Banks fell after losses by their Wall Street peers, with JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz) becoming the biggest drag on the Dow after Merrill Lynch cut the stock to an "underperform" rating and forecast a loss for the bank's fourth quarter.

Financial names Goldman Sachs Group Inc (GS.N: Quote, Profile, Research, Stock Buzz) and Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) are both due to announce results later this week.

Mitsubishi UFJ Financial Group (8306.T: Quote, Profile, Research, Stock Buzz) slipped 1.7 percent to 508 yen and Sumitomo Mitsui Financial Group (8316.T: Quote, Profile, Research, Stock Buzz) lost 3.7 percent to 339,000 yen. Mizuho Financial Group (8411.T: Quote, Profile, Research, Stock Buzz) lost 3.9 percent to 230,100 yen.

Nippon Steel Corp (5401.T: Quote, Profile, Research, Stock Buzz) and other steelmakers lost ground after the Nikkei business daily said Toyota Motor Corp (7203.T: Quote, Profile, Research, Stock Buzz) plans to ask for a cut in steel prices of about 30 percent amid slower demand. [ID:nT156065]

Nippon Steel declined 4.4 percent to 283 yen, while JFE Holdings Inc (5411.T: Quote, Profile, Research, Stock Buzz) lost 5.9 percent to 2,400 yen and Sumitomo Metal Industries Ltd (5405.T: Quote, Profile, Research, Stock Buzz) was down 1.8 percent at 217 yen.

Trade was light on the Tokyo exchange's first section, with 1.9 billion shares changing hands, compared with last week's daily average of 2.3 billion.

Declining stocks outpaced advancing ones by nearly 3 to 1. (Reporting by Elaine Lies; editing by Chris Gallagher)