The Nikkei average fell to a five-week low on Monday after hedge funds unwound positions in construction machinery makers, spurred by Nomura Securities' downgrades on sagging China demand, with investors eyeing more losses for the benchmark after it breached a key support level.
The mood was soured further after a flare-up in euro-zone debt worries hurt overall sentiment for risk assets, weighing on the euro and crude oil while bolstering gold. Hydraulic shovel maker Hitachi Construction was cut to "reduce" from "neutral" and slumped 6.0 percent to 1,676 yen and Kawasaki Heavy to "neutral" from "buy", sending the stock down 4.9 percent to 291 yen.
These falls triggered heavy selling in other stocks with high exposure to China such as Komatsu Ltd which slid 5.9 percent to 2,381 yen and was the heaviest traded stock on the main board by turnover after Nomura cut its target price by 11 percent. Fujito pointed to losses sustained on Friday on similar worries by Komatsu's biggest rival, the world's largest maker of earth-moving equipment, Caterpillar Inc, which shed 0.9 percent and dragged down Wall Street's industrial sector, and a slump in the stock with the heaviest weighting in the Nikkei, robot maker Fanuc Ltd , which fell 4.1 percent to 12,300 yen.
The benchmark Nikkei closed down 1.5 percent at 9,460.63, hitting its lowest level in five weeks, while the broader Topix shed 1.2 percent to 817.68. Traders said the Nikkei's next immediate support looms at 9,405.19, an intraday low marked on April 19.
Tokyo stocks have been hemmed into a range between 9,500 and 9,800, suggesting a lack of direction and keeping the market vulnerable to events such as the downgrade of Greece by ratings agency Fitch at the weekend, which prompted investors to move to safer assets. The euro fell broadly, hurt by ongoing worries about the potential for debt restructuring by Greece, with market positioning pointing to chances of a further drop.
Trading volume was steady with 1.82 billion shares changing hands on the main board. Analysts said this suggested that further possible losses will likely be gradual and there will not be one sudden drop. But solar-power equipment makers bucked the trend on a report by the Nikkei business daily that the Japanese government may this week announce a plan to make solar panels compulsory on the roofs of all new buildings by 2030.
Among solar panel stocks, Sharp Corp rose 1 percent to 733 yen, panel equipment maker Ulvac gained 2.5 percent to 1,942 yen, and Ishii Hyoki , a maker of silicon wafers for solar cells, surged 8.4 percent to 928 yen. "Some of the solar stocks have not fallen since the March earthquake on hopes that renewable energy will be promoted after the country was hit the nuclear crisis," said Yumi Nishimura, a senior market analyst at Daiwa Securities." "These stocks may continue to attract buying."
While the Nikkei has tumbled about 9 percent since the quake, Ishii Hyoki has risen about 10 percent, while Ulvac has only shed 0.5 percent. Also helping trim losses was a rebound in utilities, which will be called on to contribute to a fund to compensate those affected by the radiation crisis at Tokyo Electric Power Co's stricken Fukushima nuclear plant, and have been further battered by concerns that power generation and distribution could be split in a rethink of the nation's energy policy.
"Utilities just got very cheap. Some of them will still be able to pay decent dividends. They may trim them a little bit, but they have just been a bit oversold, so bargain hunters and value players are targeting them right now," said Fujio Ando, senior managing director at Chibagin Asset Management.