Nikkei drop triggered by euro zone tensions, strong yen

* Nikkei falls almost 2 percent
* Europe-related stocks battered
* Power companies surge as PM hints nuclear plants to
restart

By Sophie Knight
TOKYO, May 31 (Reuters) - Japan's Nikkei share average fell
sharply in early trade on Thursday, with exporters such as Canon
Inc and Mazda buckling under a strong yen and risk
aversion heightened after Spain and Italy appeared increasingly
unable to finance their own debt.
The Nikkei fell 1.9 percent to 8,471.66 , smashing through
the psychologically important 8,500 level as the yen firmed to a
four and a-half month high against the euro after Italian
10-year bond yields breached the 6 percent danger level on
Wednesday. The broader Topix index fell 1.5 percent to
712.98.
"A slight sense of panic emerged last night in the U.S.
market with stocks being sold up and investors buying bonds and
yen," said Kenichi Hirano, operating officer of Tachibana
Securities. "If the speed of that selling is curbed, we should
see short-covering and investors buying stocks back, or even new
investments."
Exporters with high exposure to Europe were battered, with
Canon shedding 4.4 percent and Mazda falling 3.9 percent. The
securities sector was also dragged down 2.8 percent, weighed
down by Nomura Holdings' loss of 2.7 percent, on fears
of contagion from ailing Spanish banks in need of refinancing.
Power companies surged against the current after Prime
Minister Yoshihiko Noda said on Wednesday it was necessary to
restart idled nuclear reactors that have been confirmed safe to
avoid a summer power crunch, adding that the central government
was winning support from local governments.
Kansai Electric Power Co Inc led the pack, surging
as much as 5 percent, while Shikoku Electric Power Co Inc
, Chubu Electric Power Co Inc and Hokkaido
Electric Power Co Inc gained between 2.3 and 3.7
percent.
The Nikkei is down 11 percent on the month as investors
have cut their exposure to risky assets on worries about the
impact of Spain's precarious fiscal situation on the euro zone,
as well as the implications of slowing growth in China and a
stuttering U.S. recovery.
Foreign investors sold a net 113 billion yen ($1.4 billion)
of Japanese stocks last week according to the Japanese financial
ministry, the sixth consecutive week of net selling.

"In an absolute worst-case scenario, the uncertainty
surrounding the euro zone's future could trigger another
financial panic and push the Nikkei down to 7,500," said Kenichi
Hirano, operating officer of Tachibana Securities. "That would
bring its average price-to-earning ratio from 11 now to about
9.5, the same as after the Lehman Shock in 2008."
However, some market participants were confident that buying
on the dip would emerge to lend support to the market as
Japanese stocks become increasingly reasonable.
"It all depends on whether bargain hunting will come into
play as Japanese stocks are spectacularly cheap now," said
Toshiyuki Kanayama, senior market analyst at Monex. "The
price-to-book ratio of the Nikkei is now at 0.9."
By comparison, the price-to-book ratio of both the Dow Jones
Industrial Index and the S&P 500 stands at 2.1.