Dec 26 (Reuters) - Japanese stocks recorded their

highest foreign outflow in three months in the week through Dec.

21, driven by expectations of a cautious pace of U.S. Federal

Reserve rate cuts next year.

Foreign investors withdrew a net 1.02 trillion yen ($6.48

billion) from Japanese stocks last week, registering their

largest weekly net sales since Sept. 21, data from Japan's

Ministry of Finance showed.

Last week, the U.S. Federal Reserve signalled a cautious

pace of easing next year while reducing policy rates by a

quarter point as expected.

The Nikkei index fell by 1.95% last week but has

since gained over 1% this week after a cooler-than-expected U.S.

inflation report raised hopes for Fed rate cuts next year. The

yen also weakened as the likelihood of a January rate hike by

the Bank of Japan decreased.

Foreigners have purchased about 738.3 billion yen worth of

Japanese stocks so far this year, compared with about 3.35

trillion yen worth of net purchases in the same period last

year.

Meanwhile, Japanese long-term bonds witnessed a net 1.95

trillion yen worth of foreign outflows last week, the biggest

amount in three months. Foreigners also ditched a net 2.96

trillion yen worth of short-term debt securities.

At the same time, Japanese investors bought a net 181.5

billion yen worth of foreign equities, extending net purchases

into a second successive week.

They, however, divested about 919.2 billion yen worth of

long-term foreign bonds, posting a fourth weekly net sales in

six weeks.

($1 = 157.4000 yen)