Japan's Nikkei average fell 0.4 percent to its lowest close in more than eight months on Tuesday, with the yen holding onto gains against the dollar as mounting signs of weak economic growth dampened appetite for risk. But the Nikkei pared earlier losses after a government source told Reuters that Japanese Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa are likely to meet next Monday, sending dollar/yen slightly higher.
The source said the meeting may be pushed forward to later this week, depending on market developments. In thin trade, the benchmark Nikkei's downward move came to a halt below 9,100 for the third time in four trading days, buoyed for now by short-covering. But market players said further moves depended on the yen's performance and that the 9,000 level, which has held since May 2009, could well prove vulnerable soon. "Stabilising moves in dollar/yen and a sense of relief after selling didn't pick up further after the Nikkei dipped below 9,100 sparked some short-covering," said Masayuki Otani, chief market analyst at Securities Japan, Inc.
"But that's not the end of the story. More economic data are coming out of the United States this week and the currency market will likely move accordingly. The Nikkei could break below 9,000 depending on the external environment and if it does, dumping of stocks will pick up further momentum."
The benchmark Nikkei lost 34.99 points to 9,161.68, its lowest finish since November 27 last year. It earlier fell as far as 9,084.24, within sight of a 13-month low of 9,065.94 hit last week. The broader Topix fell 0.2 percent to 826.78. Whether the Nikkei can stay above 9,000 or not is a big focus this week, market players said, with the Nikkei's next support lying at 8,697, a 61.8 percent retracement of the rally between the March 2009 low and the April 2010 high.
Charts show that in the short term, the Nikkei is close to oversold and may be due for a bit of a rebound. The benchmark is hovering near its lower Bollinger Band after falling below it on Monday, and its relative strength index (RSI) is at 38. Anything from 30 on down is considered oversold.
But over the longer term, last week's "death cross" of the Nikkei's 200-day moving average and 100-day moving average is likely to keep the benchmark under pressure, an analyst said. A "death cross" is often seen as a sell signal. TDK Corp shed 1.3 percent to 4,490 yen and Tokyo Electron Ltd slipped 1.7 percent to 4,135 yen. Market players said that while the yen's rise had not had much of an impact on company earnings forecasts for later in the year, that could change should the yen's advance continue.
Some said downward revisions would likely become a serious concern if dollar/yen reached around 80 yen and euro/yen touched about 100 yen. Amid the broad selling, a handful of shares bucked the trend. Tokyu, a railway and land development company, rose 2.1 percent to 385 yen after Deutsche Bank upgraded it to "buy" and hiked its target price. Trade was thin, with 1.29 billion shares changing hands on the Tokyo exchange's first section, near last Monday's eight month low of 1.25 billion shares.
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