Japan's Nikkei average fell 1.1 percent to a two-week closing low on Tuesday as worries about global stagflation outweighed the positive effect on exporters of the dollar's rise to a three-month high against the yen.
Bank shares, including top lender Mitsubishi UFJ Financial Group slipped after US financials were dragged down by Lehman Brothers, which forecast a $2.8 billion second-quarter loss and unveiled a plan to raise $6 billion to strengthen its capital. The benchmark Nikkei shed 160.21 points to end at 14,021.17, the lowest close since May 28, and broke below its key 25-day moving average.
The broader TOPIX index fell 1 percent to 1,383.20. Both had initially climbed, boosted by exporters and buying across the board after a fall of over 2 percent the previous day. Market participants said falls in other Asian markets spooked investors and contributed to a further decline as worries grew about a replay of the 1970s, when a spike in inflation coincided with a period of stagnant economic growth.
"Fears about global stagflation are emerging," said Tsuyoshi Segawa, an equity strategist at Shinko Securities. "If Asian economies were to really slow down, Japan wouldn't be able to stay immune to inflation because Asian exports support Japan's growth while North American exports decline."
Segawa also said real estate firms fell out of favour as European and US financial institutions move to shrink their assets, which is likely to lead to a fall in the prices of asset-backed securities, hurting property prices.
Asia-Pacific shares outside of Japan fell 2.7 percent to a two-month low, an MSCI index showed, while the Shanghai composite index tumbled 7.7 percent in response to a harsher-than-expected monetary tightening by the central bank and weakness in global equity markets.
Mitsubishi UFJ fell 1.8 percent to 1,066 yen, No 2 Mizuho Financial Group slipped 1.3 percent to 553,000 yen and Sumitomo Mitsui Financial Group, the third-biggest bank, shed 2 percent to 891,000 yen. Mitsui Fudosan Co Ltd, Japan's largest real estate developer, dropped 2.5 percent to 2,380 yen. Mitsubishi Estate Co Ltd fell 1.7 percent to 2,585 yen and Sumitomo Realty & Development Co Ltd sank 4.3 percent to 2,335 yen. Tokyu Land skidded 4.4 percent to 653 yen.
Amid a broad-based market decline, investors shrugged off the likely positive impact on exporters from the dollar's jump to a three-month high against the yen in Tokyo. Canon Inc fell 2 percent to 5,340 yen, the biggest drag on the Nikkei 225, and Advantest Corp dropped 3 percent to 2,560 yen.
On the upside, Softbank Corp, Japan's third-biggest mobile phone operator, climbed 1.1 percent to 1,877 yen after saying it would start selling Apple Inc's new iPhone in Japan from July 11. Trade was thin on the Tokyo exchange's first section, with 1.97 billion shares changing hands, compared to last week's daily average of 2.41 billion. Declining stocks outnumbered gainers by more than 2 to 1.
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