Japan's Nikkei share average fell below 13,000 in volatile trade on Tuesday as worry about stresses in China's banking system added to concerns about the US Federal Reserve's plan to scale back its stimulus. The Nikkei dropped 0.7 percent to 12,969.34 after rising as much as 1.3 percent and falling 2.3 percent at one point. Analysts say futures selling kicked in after Chinese shares sank deeper into bear market territory, extending their sharp declines from the previous day.
"Investors started worrying about how US and European markets would react to drops in China, and they rushed to sell," said Naoki Fujiwara, a fund manager at Shinkin Asset Management. Manufacturers with high exposure to China were under pressure, with Komatsu Ltd falling 3.8 percent, Hitachi Construction Machinery Co 2.7 percent and Nissan Motor Co 1.1 percent.
A recent spike in interbank borrowing costs has raised fears that strains in China's banking system could weigh on already slowing growth. This has roiled global markets, which are already grappling with the Fed's plan to scale back its stimulus. Market observers said that volatility may persist this week, while the Nikkei is expected to hover around 13,000.
"Even though some foreign investors want to reduce their positions in Japanese stocks, there are people who want to keep the Nikkei above the 13,000 level at the same time, and that's keeping the market volatile," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities. Some exporters gained on Tuesday as the dollar traded above 98 yen.
Sony Corp was up 0.4 percent, TDK Corp gained 1.6 percent and Olympus Corp rose 1.0 percent. The Topix dropped 1.0 percent to 1,078.66. The benchmark Nikkei has dropped 19 percent since reaching a 5-1/2-year high on May 23, hurt by slowing growth in China, fears of a pullback in the Fed's stimulus and disappointment over the Japanese government's recently unveiled growth strategy. The index is still up 25 percent this year, helped by Prime Minister Shinzo Abe's sweeping fiscal and monetary expansionary policies aimed at pulling the world's third-biggest economy out of a two-decade long slump. "There are few negative factors in the domestic market, but global worries are keeping investors from taking positions," Kenichi Hirano, a strategist at Tachibana Securities said.