Nikkei falls over 2 percent as strong yen saps confidence

By Aiko Hayashi

TOKYO (BestGrowthStock) – Japan’s Nikkei average dropped more than 2 percent on Wednesday as the yen’s advance to a fresh 15-year high against the dollar extinguished an upbeat mood gained from last week’s better-than-expected economic data.

A revival of concerns over European banks and uncertainty over the political situation in Japan added to the dour mood.

The Nikkei fell back toward a 16-month low below 9,000 logged last week, hurt by what some market analysts said was selling of futures by short-term investors, though the index will likely find support around 8,800, a level it tested and held a few times in recent weeks.

“With the yen’s advance accelerating and worries about credit risks in Europe heightening, the market is pressured by investor concern about risk-taking,” said Kazuhiro Takahashi, general manager at Daiwa Securities Capital Markets.

“If inaction by the government despite mentions of intervention by some officials triggers a further advance in the yen, it’s hard to think the situation will be fixed soon. As the strong yen is a drag on Japanese stocks, the index could still lose further ground.”

The benchmark Nikkei (.N225: ) ended down 2.2 percent or 201.40 points at 9,024.60 after falling as low as 8,997.63, back toward a 16-month low of 8,796.45 hit on September 1.

Global stocks had regained ground after stronger-than-expected U.S. payrolls and manufacturing data last week helped quell fears of a double-dip recession.

The broader Topix (.TOPX: ) lost 1.7 percent to 820.99.

A Wall Street Journal report reignited concerns about European sovereign debt and banks’ exposure on Tuesday, sending stocks down and lifting the low-yielding, safe-haven yen, franc and dollar.

The dollar fell as far as 83.34 yen on Wednesday, a new 15-year low and down 0.5 percent on the day, with traders testing Japanese authorities’ pain threshold for currency strength.

Bank of Japan Governor Masaaki Shirakawa reiterated on Wednesday his reluctance to return to quantitative easing but indicated the central bank was weighing its options on how to deal with the economic impact from the yen’s strength.

On the political front, Prime Minister Naoto Kan is seeking to fend off a challenge to his leadership of the ruling party from veteran powerbroker Ichiro Ozawa, with a party vote set for September 14.

Markets are keeping a close eye on political developments as it could spell a potential shift in how the country copes with the strong yen, weak economy and huge public debt.

The Nikkei struggled to snap its downward trend, with resistance lying ahead on technical charts.

Wednesday’s drop took the Nikkei below 9,190, around its 25-day moving average, which had served as resistance from August until this week. The 25-day moving average is considered a proxy for a one-month moving average and is closely watched in Japan.

Market analysts see strong support around 8,800, and after that, the next target is 8,697, a 61.8 percent retracement of the Nikkei’s rally from its March 2009 low to its April 2010 high.

The bottom of the Nikkei’s Ichimoku cloud lies around 9,500, forming resistance for the index. Ichimoku charts are popular with Japanese traders.

EXPORTERS WOES

Shares of blue chip exporters lost ground. Investors fret about a stronger yen as it eats into exporter profits and undermines the sector’s competitiveness.

Sony Corp (6758.T: ) fell 2.2 percent to 2,458 yen and Canon Inc (7751.T: ) shed 2.1 percent to 3,510 yen. Honda Motor Co (7267.T: ) skidded 2.5 percent to 2,744 yen.

Many Japanese companies have assumed a dollar/yen rate of 90 yen and euro/yen of 110-115 yen in the year to March 2011.

Unicharm Corp (8113.T: ) lost 3.2 percent to 9,470 yen after the maker of diapers and sanitary napkins said on Tuesday it would raise up to 80.5 billion yen ($961 million) through an issue of euroyen convertible bonds, triggering investor concerns over a dilution to per-share value once the bonds are converted.

Unicharm set the conversion price at 11,650 yen.

Some 1.47 billion shares changed hands on the Tokyo exchange’s first section, the lowest volume this week.

Declining shares outnumbered advancing ones by 7 to 1.

(Additional reporting by Shinichi Saoshiro; Editing by Chris Gallagher)

Nikkei falls over 2 percent as strong yen saps confidence