Asian stocks fell on Friday in a broad wave of profit-taking, giving up much of this week's gains, while a ratings cut gave investors an excuse to reduce their Japanese share holdings.

For the week, the MSCI index of Asian stocks outside Japan <.MIAPJ00000PUS> is set to eke out meager gains, thanks to the U.S. Federal Reserve reiterating its dovish policy stance this week, indicating flows toward emerging markets will remain strong for now.

Still, Asian shares have underperformed the MSCI world index <.MIWD00000PUS>, which has risen by 2.5 percent since the beginning of the year on a combination of factors such as frothy valuations and a steady drip of positive data out of Europe and the United States.

Data due later on Friday is expected to show the U.S. economy gathered speed in the fourth quarter, with the biggest gain in consumer spending in four years offering the clearest signal yet that a sustainable recovery is under way.

Last week, Asian stocks fell by more than 6 percent, their biggest percentage fall in nearly two months, as investors shied away from markets such as Indonesia and India, on concern inflation may be getting out of hand.

We had a billion dollars of outflows in a very short time and there is bound to be some more selling pressure due to that, which is what we are seeing after some gains this week, said Markus Rosgen, head of Asia ex-Japan strategy at Citigroup.

With the Chinese New Year coming up, some people are concerned about market liquidity too, Rosgen said, referring to a long Lunar New Year holiday next week.

Citi strategists recommend staying underweight in Indian and Southeast Asian shares and overweight in North Asia stocks.

India's stock index <.BSESN> is poised to register its worst monthly performance since October 2008 and 10-year Indonesian bond yields have risen by the most since early 2009.

Corporate earnings were robust, with Samsung <005930.KS>, the world's top memory chipmaker, set to show improved results, sending its shares to a record.

The Nikkei average <.N225>, one of the best performing markets this year, was down more than 1 percent, on worries of higher borrowing costs for financial companies, after Standard & Poor's cut Japan's credit rating by a notch.

LIMITED IMPACT

Japanese government bonds advanced, taking the ratings cut in stride, as investors focused more on the country's ample savings and largely domestically held debt.

March 10-year futures opened lower, but quickly reversed losses to be up 0.20 points at 139.98 as the downgrade had largely been seen as a matter of time. On Thursday evening, it fell to as low as 139.48 immediately after the downgrade.

Ten-year yields edged lower to 1.215 percent and credit default swaps widened slightly to around 83 bps, but well below peaks of near 100 bps hit in 2010.

JGBs are almost entirely owned by domestic investors, as it has often been pointed out, and that is limiting the downgrade's impact, said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

This limits any impact of selling by foreign investors, who may take a dimmer view on JGBs in the wake of the rating cut.

The euro fell, giving in to a bout of profit-taking after strong gains in the past two weeks took it to a 2-month high of $1.3760. An Asian sovereign name was spotted selling the single currency, traders said.

Gold held near four-month lows, after falling more than 2 percent the previous day, on muted safe-haven demand.

(Additional reporting by Ayai Tomisawa and Shinichi Saoshiro in Tokyo; Editing by Robert Birsel)

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