Nikkei slips on Korea tensions but finds support

By Antoni Slodkowski and Chikafumi Hodo

TOKYO (BestGrowthStock) – Japan’s Nikkei share average fell 0.8 percent on Wednesday as North Korea’s shelling of a South Korean island the previous day rattled investors and increasing euro-zone debt worries spurred profit-taking.

But the Nikkei managed to finish the day above the closely watched 10,000 level as the dollar’s gains versus the yen in the past few weeks, after falling to 15-year lows, induced solid bargain-hunting, traders said.

“I believe Tokyo participants have reacted pretty calmly to the Korean turmoil, which resulted in limited falls in Japanese shares today,” said Shoji Yoshigoe, a senior strategist at Mitsubishi UFJ Morgan Stanley Securities.

“The fact that falls in South Korean shares were limited was also positive for Japanese stocks,” he said.

The Nikkei (.N225: ) fell more than 2 percent from Monday’s close early in the session but trimmed its losses to end the day down 0.8 percent at 10,030.11.

The broader Topix index (.TOPX: ) shed 1 percent to 866.57.

Japanese financial markets were closed for a national holiday on Tuesday, when other major stock indexes fell as investors looked for safe havens in the U.S. dollar, gold and government bonds after the exchange of fire on the Korean peninsula.

On Wednesday, Asian shares were mixed, with South Korean shares easing a slight 0.2 percent (.KS11: ) while Hong Kong (.HSI: ) and Shanghai (.SSEC: ) shares edged higher.

Trading volume on the Tokyo exchange’s first section totaled 2.1 billion shares, for a slightly busier day than the previous five trading sessions when daily volume averaged 1.9 billion shares.

Equities analysts in Tokyo said they expected that Korean tensions would cool and that their impact on Tokyo shares could prove fleeting.

Investors were encouraged to buy Japanese shares on dips as the dollar held above 83 yen, traders said.

The euro was off its lows against the yen despite a downgrade of Ireland’s long-term sovereign credit rating by Standard & Poor’s, which warned that a further downgrade was possible.

ROOM TO RISE

“Investors wanted to book profits after the recent rally,” said Fumiyuki Takahashi, equity strategist for Barclays Capital Japan.

“But this drop in the Nikkei, provided there is no further friction on the Korean peninsula, will only be temporary because the dollar/yen rate is steady above 83 yen and earnings of Japanese companies were better than the market had expected.”

Many Tokyo traders said they believed the Nikkei still had plenty of room to rise.

“The basic bullish trend toward Japanese shares has not changed. The Nikkei still can go up by around 500 to 1,000 points from the current level by the end of the year,” said Shoji Hirakawa, chief equities strategist at UBS Securities Japan.

“I feel that there are many investors who have made a lot of profits by investing in equities and I don’t think they are keen about unloading their positions in stocks now.”

The Nikkei’s rise had been starting to look overstretched, however, after it hit a five-month closing high on Monday, when the benchmark’s gap above its 25-day moving average — a gauge that is watched closely by Japanese traders — climbed into overbought territory.

As of Monday’s close, the Nikkei’s divergence above the 25-day moving average had risen to 5.5 percent.

Upward gaps of more than 5 percent suggest that stocks are overbought. The last time the divergence rose as high as 5.5 percent was on April 5, when the Nikkei hit its 2010 intraday high of 11,408.17.

From there the benchmark share average skidded nearly 18 percent in about two months.

By Wednesday’s close, that divergence had narrowed to 4.4 percent.

Shares of Inpex Corp (1605.T: ), Japan’s top oil explorer, fell 2.1 percent to 438,000 yen after oil prices slipped on Tuesday, as fears of the escalating euro zone debt crisis and tensions on the Korean peninsula triggered gains in the dollar.

But defense-related shares rallied, with Tokyo Keiki Inc (7721.T: ), a maker of instruments for aircraft and boats, climbing 1.8 percent to 116 yen.

Trading house Sojitz Corp (2768.T: ) surged 9.1 percent to 168 yen after it said it would forge a rare earth procurement deal with Australian miner Lynas Corp (LYC.AX: ).

(Additional reporting by Masayuki Kitano; Editing by Edmund Klamann)

Nikkei slips on Korea tensions but finds support