By V. Phani Kumar, MarketWatch

HONG KONG (MarketWatch) -- Japanese shares beat a sharp retreat after opening comfortably higher on Friday, with a wave of selling ahead of weekend elections in the country also weighing on other regional markets.

The Nikkei Stock Average rose nearly 1% before suffering heavy losses that dragged the benchmark down to a loss of 2.7% within a matter of minutes, which traders attributed to selling in the futures market but not related to any particular news. The benchmark later moved off its lows but was still down 1% at the midday break.

"It's just positioning. ... The market was long, and the Nikkei Stock Average has failed to break significantly higher despite the fact that the S&P 500 breached its May highs. ... [For traders], if you don't like the move, you get out," said Sunrise Brokers head of Asian equities Ben Collett.

Elsewhere in the region, Hong Kong's Hang Seng Index was up 0.3%, Australia's S&P/ASX 200 lost 0.5%, and South Korea's Kospi was flat, with each changing direction in choppy trade.

On the upside, the Shanghai Composite advanced 0.3%.

The volatility in Tokyo came ahead of the country's upper house elections this weekend, in which the ruling Liberal Democratic Party is expected to easily clinch a majority.

The LDP already has a majority in the lower house of the parliament, and a majority in the upper chamber of the Diet was widely expected to strengthen Prime Minister Shinzo Abe's government in its attempt to revive the Japanese economy.

However, "it will not be plane sailing once the voting is out of the way. The politicians could be forgiven for putting off difficult decisions until after the elections, but hard choices will have to be made soon to maintain the markets' confidence," Capital Economics wrote in a report.

Regional markets began the day on a positive note after the Dow Jones Industrial Average (DJI) and the Standard & Poor's 500 Index (SPX) ended at record highs Thursday on Wall Street.

Those gains came after the second day of congressional testimony from Federal Reserve Chairman Bernanke and some upbeat earnings results, including from Morgan Stanley (MS). Moody's Investors Service also lifted its outlook on U.S. credit ratings to stable, while reaffirming the country's AAA sovereign rating.

Stocks across sectors were affected by the volatility in Tokyo trading. Shares of Tokyo Electron Ltd. (TOELY) slumped 5%, Tokyo Electric Power Co. (TKECY) sank 4.6%, and Isuzu Motors Ltd. (ISUZY) fell 2.5%, with each of them reversing early gains.

Sharp Corp. (SHCAY) came off early highs but was still up 1.5% after the Nikkei newspaper reported it was considering raising funds via a private placement to Lixil Group Corp. and Makita Corp. .

Shares of Lixil added 1.3%, and Makita fell 1.4%.

Panasonic Corp. (PCRFY) rose 1.3% following reports the company and its unit Sanyo Co. will pay $56.5 million in fines in the U.S. for their involvement in a price-fixing case.

Hong Kong shares were supported as heavyweight stock HSBC Holdings PLC (HBC) rose 1.1% after the higher finish on Wall Street. Chinese banks aided the market in Shanghai, with Agricultural Bank of China Ltd. (ACGBY) rising 0.8%, and Bank of China Ltd. (BACHY) gaining 1.1%.

However, shares of property developers retreated in Hong Kong, with China Overseas Land & Investment Ltd. (CAOVY) losing 1.7%.

Santos Ltd. fell 3.5% after reporting a decline in production and cutting forecasts for oil and gas output.

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