The Nikkei stock average fell 0.8 percent on Wednesday, with Canon Inc and other exporters hit by a stronger yen while bank shares slid after a brokerage downgraded two of Japan's biggest banks. J.P. Morgan cut its ratings on Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group to "neutral" from "overweight" and lowered its sector stance to "slightly bearish" from "neutral".
Additional pressure came from losses in Chinese shares, with Hong Kong's Hang Seng Index down 1 percent. The benchmark Nikkei lost 81.09 points to 10,312.14, with resistance seen at 10,400 - about the level of its 25-day moving average. The broader Topix slid 0.7 percent to 939.84. The yen's strength has been a major trading factor for the Nikkei this week, after the Japanese currency hit a seven-week high last week.
Since late August, the yen has been above levels expected by major manufacturers for the current financial year, giving rise to worries about corporate earnings. The dollar was steady against the yen at 92.31 yen, near a seven-week low of 91.94 yen hit last week. Orders placed through foreign securities houses ahead of the start of trade have shown foreign investors, long a key driver and setter of direction for the Nikkei, to be net sellers virtually every day since August 30, when the ruling Liberal Democratic Party lost to the Democratic Party.
The Democratic Party is set to form a new government to take power next week. The average exchange rate for the dollar versus the yen expected by major manufacturers for the year to March 2010 was 94.85 yen, with 94.77 yen expected for the second half, Bank of Japan data shows. "The yen is showing signs of strengthening again If the dollar falls below 92 yen the impact may be big and such concerns are weighing on stocks," said Yutaka Miura, senior technical analyst for Mizuho Securities.
Among exporters, Canon fell 2.8 percent to 3,490 yen and Honda Motor Co slipped 2.4 percent to 2,855 yen. Toyota Motor Corp lost 1.8 percent to 3,800 yen. Mitsubishi UFJ Financial Group shed 3 percent to 527 yen, Sumitomo Mitsui Financial Group fell 2.7 percent to 3,610 yen and Mizuho Financial Group lost 2 percent to 200 yen.
"We think share price characteristics, economic policy, credit costs, core banking business activity, and capital adequacy regulations all point to a stalemate in bank sector stocks," Katsuhito Sasajima, a senior analyst at J. P Morgan Securities Japan, said in a research note. Apparel maker Renown Inc soared 14.2 percent on news that it was selling Aquascutum, a loss-making 158-year-old raincoat maker, to another British luxury fashion brand, Jaeger, for an undisclosed sum.
Oil and gas field developer Inpex and other oil-linked shares climbed after crude oil rose 4.5 percent on Tuesday to hover around $71 a barrel. Inpex gained 3.9 percent to 770,000 yen and distributor Showa Shell Sekiyu rose 1.8 percent to 1,013 yen. Trading volume picked up a bit, with 2.01 billion shares changing hands on the Tokyo exchange's first section, up from last week's daily average of 1.89 billion shares. Decliners outnumbered advancing shares by roughly 2 to 1.
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