Brokers said the yen's rally against the dollar triggered selling in Japanese shares from the outset, but selling pressure soon eased on expectations that the yen's rise would slow.

The yen was quoted at 111.65-68 to the dollar at 11:00 A.M. (0200 GMT) against 111.90 in New York Wednesday afternoon and 113.07-09 here late Wednesday.

``I think most people in the market believe that the yen's rise to 111 and 110 will be unreasonable,'' Okasan Securities Co. Ltd.'s Chief strategist Tetsuya Ishijima said.

Investors ``began to have expectations the US side will make some sort of comments on the foreign exchange rate even if it does not take any action,'' Ishijima said. The Nikkei's rise for eight straight trading days through Wednesday, despite the yen's recent appreciation, proved that investors' expectations for the economy'srecovery were intact, brokers said.

``In the current market, investors are betting on the economic recovery,'' Okasan's Ishijima said.

The Nikkei index has come down from this year's high of 18,532.58 points touched on July 19 because of the yen's recent strength, he said, but hopes for the economy's improvement prevented panic selling.

``I think (the Nikkei) will top the high so far this year of 18,532 points sometime in September,'' said Ishijima.

``There will be a time the dollar regains ground against the yen and return to thE 115-to-116 range, and if that happens, stocks may possibly skyrocket then,'' he added.

Some exporters were hit by heavy selling in the morning session on concerns the yen's rise would seriously erode their profits in the second half of their financial year to March 2000, brokers said.

Canon, whose exports account for nearly 80 per cent of total sales, lost 280 yen or 7.3 per cent to 3,570 yen. On Wednesday, the company reported a 26.8-per cent fall in parent-level netprofit in the first half. Sony fell 510 yen or 3.4 per cent to 14,460.

European shares mixed in sleepy summer trading

European shares ended mixed Wednesday with London taking heart from subdued retail sales figures, but Paris and Germany slipping back on weakness on Wall Street.

In London, the benchmark FTSE-100 index ended up 0.57 per cent, or 35.4 points, at 6,201.8. The CAC-40 index of leading shares closed down 0.49 points, or 0.01 per cent, at 4,479.26 and in Frankfurt the X-DAX ended 0.56 per cent lower at 5,230.47. The British market was encouraged by retail sales figures for July showing an increase of just 0.1 per cent against expectations of a rise of 0.5 per cent.

Minutes from a meeting of the Bank of England's monetary policy committee meeting, released Wednesday, showing that members had been unanimous in agreeing to leave interest rates unchanged at 5.0 per cent also helped sentiment.

The data and the minutes helped allay fears of an imminent tightening in Britishmonetary policyfollowing signs of a recovery in the economy. The rate sensitive banking and property sectors were among those to benefit from an easing in interest rate fears.

Halifax, a major mortgage lender, gained 13.5 pence to 667.5 pence,Alliance and Leicester gained 15 pence to 823.5 pence and Lloyds TSB was up 4.5 pence at 853. In Paris, gains in the banking and retail sectors pushed the index higher through the morning before a wave of profit-taking on Wall Street dragged it back late in the session, dealers said.

``We were following the Dow closely today but volumes were really quite thin and the banking story is still the main interest,'' said one broker. Banking stocks were lifted by expectations that the three-way merger that BNP's bid failed to achieve will be realised by stealth, dealers said.

BNP gained a majority of Paribas but less than 40 per cent in Societe Generale ina double hostile takeover offer aimed at creating the world's biggest bank.

``There's a belief that Societe Generale will be leanton heavily by the government and will come to the table,'' the broker said.

Wall Street was also the main driving factor in Germany, where volumes were low in summer-holiday bound trading. The banking sector was again one of the most active on speculation of a merger Between Deutsche Bank and Dresdner Bank, although most major banking stocks ended down.