* Construction, smelters to keep rising in Q1 - fund manager
* TEPCO ends flat; trading by speculators, short-term investors cited
* Nikkei seen bouncing back to prequake levels by end of 2011
* Property to take a hit midterm as demand falters -fund manager
* Nikkei down 5.1 pct in Q4, up 0.5 pct on the day on window-dressing
By Antoni Slodkowski
TOKYO, March 31 (Reuters) - Japan's Nikkei average fell 5 percent in the January-March quarter, hit by this month's devastating earthquake, and investors said the market may remain weak and volatile until late summer with earnings weak and possible power shortages looming.
The benchmark managed a modest 0.5 percent gain on the quarter's final day of trade, however, while fund managers are shifting into construction stocks and smelters and away from domestic-demand shares on expectations of heavy spending on reconstruction, with the government possibly spending $120 billion.
Portfolio managers also said the benchmark index would likely recover to prequake levels by the end of 2011 with foreign investors seen targeting blue-chip exporters with cheap valuations as they rebuild their supply chains and the world economy picks up steam.
"In the April-June quarter, we may see construction firms going even higher on increased spending on infrastructure and rebuilding," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.
Building-related shares spiked in the final quarter of the Japanese business year, with Komatsu Ltd , the world's No.2 construction machinery maker with both global exposure and reconstruction expertise, adding 10 percent after the quake.
"Property and retailers, department stores are facing very hard times as domestic demand will probably go down with so many people struggling after the disaster," Ogawa said. The real estate sector tumbled 12 percent after the quake and more downside is expected for the shares.
Takashimaya Co , a major department store chain, has fallen nearly 20 percent since the quake, reflecting worries over falling demand.
The benchmark Nikkei average ended Thursday trade at 9,755.10, while the broader Topix advanced 0.4 percent to 869.38, pushed higher by year-end window-dressing.
Trading volume, at 2.7 billion shares on the Tokyo Stock Exchange's first section, softened compared with the first two weeks after the quake, as many investors held to the sidelines on the last day of the business year.
TEPCO TRADES
Shares of Tokyo Electric Power Co (TEPCO), the operator of a quake-stricken nuclear plant, ended the day flat but is 78 percent below its prequake levels. With more than $90 billion of debt, the company may face nationalisation. [ID:nL3E7EV039v]
Investors bought back underweight bank shares, which are among the hardest-hit since the March 11 disaster. Tokyo's subindex of banking stocks has lost 11 percent since the quake.
Thomson Reuters data shows banking shares trade at a price-to-book ratio of 0.7, below 1.1 for the Nikkei index.
Japan's government may need to spend over 10 trillion yen ($120 billion) in emergency budgets for disaster relief and reconstruction, the country's deputy finance minister signalled on Thursday.
"The market is still cautious about the outlook due to concerns about the fate of the nuclear plant. Uncertainty over the power shortage and worries over falling consumption also should weigh on shares," said Takashi Ohba, senior strategist at Okasan Securities.
Underscoring those concerns, optical glass maker Hoya Corp slipped 0.5 percent to 1,898 yen, after the firm suspended some production due to rolling power blackouts that hit the Tokyo area after the quake and tsunami damaged thermal power plants and triggered a nuclear safety crisis.
Rival Ohara Inc , Japan's largest maker of optical glass for SLR cameras, lost 0.9 percent to 946 yen. The firm said it was producing at less than full capacity and deliveries to customers could be affected as a result of power cutbacks. (Additional reporting by Chikafumi Hodo; Editing by Edmund Klamann) Reuters Terminal users can see other related news and rates by double-clicking on: All Nikkei indices <0#.NIKKEI> All shares listed on The benchmark Nikkei ended the day up 1.1 percent or 101.12 points at 9,536.13, Nikkei-225 <0#.N225> N225 index TOPIX index Nikkei Japan 1000 TOPIX sector data Nikkei 300 index TOPIX futures data <0#JTI:> Osaka N225 data <0#JNI:> Chicago N225 data <0#NK:> Top 30 by volume Top 30 by value Total volume Total value 1st section sector RICs All TSE weighted avg Top 30 gainers by pct Top 30 losers by pct Top 30 net gainers Top 30 net losers
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