Japanese stocks slipped from a seven-month high on Friday on profit taking, though were poised to outperform the rest of Asia this week, while U.S. Treasuries were steady on the view yields had risen too high, too quickly.

With three weeks to go in 2010, investors were reluctant to throw much money into any single trade now that a big selloff in Treasuries died down and opted to take profits on small positions in thin trading volumes.

Whether China would raise interest rates this year, perhaps even this weekend, was still a question on investors' radar screens with regard to risk taking, especially after a state-run newspaper said inflation may have hit 5.1 percent in November.

Tighter policy in China and other emerging markets though has already been factored into economic and market forecasts for 2011, a year in which some strategists favor riskier assets such as stocks, commodities and credit but not government bonds.

The environment looks quite favourable for equities now, but as we proceed through 2011 investors need to be alert to a change, Larry Kantor, head of research at Barclays Capital, said in a statement.

Overstretched valuations may provide that signal, as might central banks in emerging market countries as they pull back from extremely supportive policies over the course of 2011.

Japan's Nikkei share average was down 0.4 percent <.N225> after briefly touching the highest since May 14, with investors concerned for a second day that share prices have been pushed up too quickly without any fundamental news to support the move.

On top of profit-taking and overheating of the market, some foreign investors are unloading positions and hedging ahead of the Christmas break, said Hiroaki Kuramochi, chief equity marketing officer at Tokai Tokyo Securities in Tokyo.

The broader TOPIX index was up 1.2 percent <.TOPX> so far this week, exceeding the flat reading of the MSCI index of Asia Pacific stocks outside of Japan <.MIAPJ0000PUS>.

The MSCI index was also relatively unchanged on Friday, with gains in financials offset by declines in the materials and consumer sectors.

The U.S. Treasury market cooled down after global investors sold mid to longer-maturity bonds earlier in the week after news the White House proposed a payroll tax holiday that some analysts and fund managers reckon could boost growth next year as much as a full percentage point.

The March 10-year U.S. Treasury future was up around 4/32, while the cash 10-year note yield was relatively unchanged on the day at 3.21 percent. The yield is up 41 basis points so far in December, on track for the biggest monthly increase since December 2009 when yields rose 64 basis points.

Pacific Investment Management Co, which runs the world's biggest bond fund, is revising its U.S. growth forecast for next year in light of the tax-cut compromise. PIMCO sees the economy growing 3 percent to 3.5 percent in the fourth quarter of 2011 from the same period of this year. That compares with its previous estimate for 2 percent to 2.5 percent growth.

The euro was flat at $1.3234 with overnight news that Fitch Ratings downgraded Ireland's sovereign debt rating keeping dealers from buying on dips.

The euro reacted well to the Fitch news on Ireland and that really tells you that maybe this story is too well known and traders don't really want to sell it, said Robert Rennie,

chief currency strategist at Westpac Bank in Sydney.

The euro was still in a downtrend after hitting a 9-month high in early November and down 7.5 percent so far this year. However, for all the worries over the euro zone fiscal crisis, the currency is seen down only roughly two cents in 12 months to $1.3050, a Reuters poll of analysts showed.

(Additional reporting by Ian Chua in SYDNEY and Antoni Slodkowski in TOKYO)