Japanese shares could for a rocky ride next week after losing nearly 3.0 percent Friday as ratings downgrades on Greece and Spanish banks spooked investors, piling pressure on the euro, analysts said. In the week to May 18, the benchmark Nikkei 225 index at the Tokyo Stock Exchange lost 3.82 percent, or 342.00 points, to 8,611.31.
The broader Topix index of all first-section issues fell 4.33 percent, or 32.84 points, to 725.54. "For a developed market, it's important to remember that Japan tends to trade in a more volatile fashion than its peers," said CLSA equity strategist Nicholas Smith. With the Nikkei approaching its 2011 closing level of 8,455.35, investors may be looking to book last-chance profits, he added. On Friday, the index plunged as much as 3.25 percent in late afternoon trade before making up some ground to close 2.99 percent lower.
Dealers said the plunge was partly driven by stop-loss selling among fund managers looking for an exit amid a broader fall in Asia. Investor fears have been building over concern Greece will exit the eurozone, with a possibly devastating impact on the beleaguered bloc, while disappointing US economic data also weighed.
Fitch cut Greece's rating a notch Thursday amid fears anti-austerity parties will triumph in new elections set for next month. And Moody's downgraded 16 Spanish banks - including its top two - citing the effects of an ongoing recession and the nation's reduced creditworthiness.
The bad news out of Europe has hit the euro hard in recent days, sending the safe haven yen higher. However, a buying drive on Japanese equity markets may kick in next week after the extended downturn, Lorne Steinberg, head of Canadian-based Lorne Steinberg Wealth Management, told Dow Jones Newswires. "If the Japan market was cheap before, it's wildly undervalued now," he said, adding: "Japan hasn't looked this positive in years, and Friday's Nikkei fall represents a very compelling buy catalyst."